-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OigRySiyBR0kjQA/G5FduLTECrKn0K9XeDc/730MlrOJB9aZ+vq1yAlTUDfyilnn Jaji/N1Kswy8c9qCzKTzNw== 0001012870-97-000999.txt : 19970514 0001012870-97-000999.hdr.sgml : 19970514 ACCESSION NUMBER: 0001012870-97-000999 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970513 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ESSEX PROPERTY TRUST INC CENTRAL INDEX KEY: 0000920522 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 770369576 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13106 FILM NUMBER: 97602722 BUSINESS ADDRESS: STREET 1: 777 CALIFORNIA AVE CITY: PALO ALTO STATE: CA ZIP: 94304 BUSINESS PHONE: 4154943700 MAIL ADDRESS: STREET 1: 755 PAGE MILL RD CITY: PALO ALTO STATE: CA ZIP: 94304 10-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File No. 1-13106 ESSEX PROPERTY TRUST, INC. (Exact name of Registrant as specified in its Charter) Maryland 77-0369576 (State or other jurisdiction (I.R.S.Employer of incorporation or organization) Identification No.) 777 CALIFORNIA AVENUE, PALO ALTO, CALIFORNIA 94304 (Address of principal executive offices) (Zip code) (415) 494-3700 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months for such shorter period that the Registrant was required to file such report, and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 13,599,616 shares of Common Stock as of April 30, 1997 Page 1 of 77 INDEX Exhibit Number Description Page Number - ------- ----------- ----------- PART I: FINANCIAL INFORMATION - ------ --------------------- Item 1: Financial Statements (Unaudited) 3 Condensed Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996 4 Condensed Consolidated Statements of Operations for the three months ended March 31, 1997 and 1996 5 Condensed Consolidated Statements of Stockholders' Equity for the three months ended March 31, 1997 6 and the year ended December 31, 1996 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1997 and 1996 7 Notes to Condensed Consolidated Financial Statements 8 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II: OTHER INFORMATION - ------- ----------------- Item 6: Exhibits and Reports on Form 8-K 16 Signatures 17 Page 2 of 77 PART I FINANCIAL INFORMATION - ------ --------------------- ITEM 1: FINANCIAL STATEMENTS (UNAUDITED) -------------------------------- "Essex" means Essex Property Trust, Inc., a real estate investment trust incorporated in the State of Maryland, or where the context otherwise requires, Essex Portfolio, L.P., a partnership in which Essex Property Trust, Inc. is the sole general partner. The information furnished in the accompanying condensed consolidated balance sheets, condensed consolidated statements of operations, stockholders' equity and cash flows of Essex reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the aforementioned financial statements for the interim periods. The accompanying unaudited financial statements should be read in conjunction with the notes to such financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. Page 3 of 77 ESSEX PROPERTY TRUST, INC. Condensed Consolidated Balance Sheets (Unaudited) (Dollars in thousands)
March 31, December 31, Assets 1997 1996 ------ ----------------- ----------------- Real estate: Rental properties: Land and land improvements $ 116,929 $ 90,557 Buildings and improvements 364,089 303,252 ----------------- ----------------- 481,018 393,809 Less accumulated depreciation (50,703) (47,631) ----------------- ----------------- 430,315 346,178 Investments 3,244 8,537 ----------------- ----------------- 433,559 354,715 Cash and cash equivalents-unrestricted 8,298 42,705 Cash and cash equivalents-restricted 4,618 4,194 Notes and other related party receivables 23,806 2,362 Notes and other receivables 64,449 5,293 Prepaid expenses and other assets 4,000 3,745 Deferred charges, net 4,299 4,160 ----------------- ----------------- $ 543,029 $ 417,174 ================= ================= Liabilities and Stockholders' Equity ------------------------------------ Mortgage notes payable $ 183,358 $ 153,205 Lines of credit 34,420 0 Accounts payable and accrued liabilities 10,528 7,346 Dividends payable 6,289 6,286 Other liabilities 2,819 2,249 ----------------- ----------------- Total liabilities 237,414 169,086 Minority interest 25,211 25,281 Stockholders' equity: 8.75% Convetible Preferred Stock, Series 1996A: $.0001 par value, 1,600,000 authorized and 800,000 issued and outstanding 1 1 Common stock, $.0001 par value, per share, 668,400,000 and 668,400,000 authorized, 13,596,566 and 11,591,650 issued and outstanding 1 1 Excess stock, $.0001 par value per share, 330,000,000 shares authorized, no shares issued or outstanding Additional paid-in capital 314,324 256,106 Accumulated deficit (33,922) (33,301) ----------------- ----------------- Total stockholders' equity 280,404 222,807 ----------------- ----------------- $ 543,029 $ 417,174 ================= =================
See accompanying notes to the unaudited financial statements. Page 4 of 77 ESSEX PROPERTY TRUST, INC. Condensed Consolidated Statements of Operations (Unaudited) (Dollars in thousands, except per share amounts)
Three months ended --------------------------------- March 31, March 31, 1997 1996 ------------ ---------- Revenues: Rental $ 17,356 $ 10,951 Interest and other income 1,195 603 ------------ ---------- 18,551 11,554 ------------ ---------- Expenses: Property operating expenses Maintenance and repairs 1,494 1,007 Real estate taxes 1,422 886 Utilities 1,138 756 Administrative 1,152 656 Advertising 270 151 Insurance 238 146 Depreciation and amortization 3,088 2,190 ------------ ---------- 8,802 5,792 ------------ ---------- Interest 3,363 2,901 Amortization of deferred financing costs 127 245 General and administrative 516 397 Loss from hedge termination 0 21 ------------ ---------- Total expenses 12,808 9,356 ------------ ---------- Net income before minority interest and extraordinary item 5,743 2,198 Minority interest (875) (75) ------------ ---------- Income before extraordinary item 4,868 2,123 Extraordinary item: Loss on early extinguishment of debt 0 (2,180) ------------ ---------- Net income/(loss) $ 4,868 $ (57) ============ ========== Per share data: Net income per share from operations before extraordinary item $ 0.38 $ 0.34 Extraordinary item - debt extinguishment 0.00 (0.35) ------------ ---------- Net income/(loss) per share $ 0.38 $ (0.01) ============ ========== Weighted average number of shares used in net income/(loss) per share calculation 11,784,952 6,275,000 ============ ========== Dividend per share $ 0.435 $ 0.425 ============ ==========
See accompanying notes to the unaudited financial statements. Page 5 of 77 ESSEX PROPERTY TRUST, INC. Condensed Consolidated Statements of Stockholders' Equity For the three months ended March 31, 1997 and the year ended December 31, 1996 (Unaudited) (Dollars and shares in thousands)
Retained Preferred stock Common stock Additional earnings/ ----------------------- ----------------------- paid - in (Accumulated Shares Amount Shares Amount capital deficit) Total --------- ------------- --------- ------------- ------------ ------------ ----------------- Balances at December 31, 1995 6,275 $ 1 $ 112,070 $ (27,342) $ 84,729 Net proceeds from preferred stock offering 800 $ 1 - - 17,504 - 17,505 Net proceeds from follow-on public offerings - - 5,313 - 126,464 - 126,464 Net proceeds from options exercised - - 4 - 68 - 68 Net income - - - - - 8,881 8,881 Dividends declared - - - - - (14,840) (14,840) --------- ---------- --------- ---------- ---------- ---------- -------------- Balances at December 31, 1996 800 1 11,592 1 256,106 (33,301) 222,807 Net proceeds from options exercised - - 5 - 99 - 99 Net proceeds from offering 2,000 58,119 58,119 Net income 4,868 4,868 Dividends declared (5,489) (5,489) --------- ---------- --------- ---------- ---------- ---------- -------------- Balances at March 31, 1997 800 $ 1 13,597 $ 1 $ 314,324 $ (33,922) $ 280,404 ========= ============= ========= ============= ============ ============ =================
See accompanying notes to the unaudited financial statements Page 6 of 77 ESSEX PROPERTY TRUST, INC. Condensed Consolidated Statements of Cash Flows (Unaudited) (Dollars in thousands)
Three months ended ----------------------- March 31, March 31, 1997 1996 --------- -------- Net cash provided by operating activities $ 12,674 $ 5,695 --------- -------- Cash flows from investing activities: Additions to rental properties (51,032) (12,748) Additions to notes receivable (785) - Investments in corporations and joint ventures (64) 154 --------- -------- Net cash used in investing activities (51,881) (12,594) --------- -------- Cash flows from financing activities: Proceeds from mortgage and other notes payable and lines of credit 34,420 45,271 Repayment of mortgage and other notes payable and lines of credit (665) (34,568) Additions to deferred charges (267) (225) Additions to notes and other related party receivables/payables (22,805) 2,166 Repayment of notes and other related party receivables/payables 1,361 (3,622) Decrease in offering related accounts payable (630) - Net proceeds from stock options exercised 99 - Distributions to minority interest/partners (807) (778) Dividends paid (5,482) (2,677) --------- -------- Net cash provided by financing activities 5,224 5,567 --------- -------- Net decrease in cash and cash equivalents (33,983) (1,332) Cash and cash equivalents at beginning of period 46,899 3,983 --------- -------- Cash and cash equivalents at end of period $ 12,916 $ 2,651 ======== ======== Supplemental disclosure of cash flow information: Cash paid for interest $ 3,126 $ 2,910 ======== ======== Supplemental disclosure of non-cash investing and Financing activities: Mortgage note payable assumed in connection with purchase of real estate $ 30,818 $ - ======== ======== Dividends payable $ 6,289 $ 3,455 ======== ========
See accompanying notes to unaudited financial statements. Page 7 of 77 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1997 AND 1996 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) (1) ORGANIZATION AND BASIS OF PRESENTATION -------------------------------------- The unaudited condensed consolidated financial statements of Essex Property Trust, Inc. ("Essex" or the "Company") are prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. In the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included and are normal and recurring in nature. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 1996. The consolidated financial statements for the three months ended March 31, 1997 and 1996 include the accounts of the Company and Essex Portfolio, L.P. (the "Operating Partnership", which holds the operating assets of the Company). The Company is the sole general partner in the Operating Partnership, owning an 88.0% and 77.2% general partnership interest in it as of March 31, 1997 and 1996, respectively. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. (2) SIGNIFICANT TRANSACTIONS ------------------------ (A) Equity Transaction ----------------------- On March 31, 1997 the Company completed the sale of 2,000,000 shares of Common Stock to Cohen & Steers Capital Management. The 2,000,000 shares are newly issued and registered under a shelf registration statement previously filed by Essex. This privately negotiated transaction generated gross proceeds of approximately $58,250, and such proceeds will be used to reduce debt and acquire additional multifamily properties in the Company's targeted West Coast markets. Proceeds from this offering were received April 3, 1997. (B) Acquisitions ---------------- (i) On January 3, 1997, the Company acquired Wilshire Promenade Apartments, a 128 unit apartment community in Fullerton, California, for a contract price of $10,250. The community features a swimming pool, spa and exercise room. (ii) On January 28, 1997, the Company acquired Tara Village Apartments, a 168 unit apartment community in Tarzana, California, for a contract price of $10,300. The community features a playground, sauna, swimming pool and recreation room. (iii) On January 30, 1997, Essex purchased the ownership interest of its joint venture partner, Acacia Capital Corporation, in The Shores and Bristol Commons properties, and is now the sole owner of these properties. Essex acquired Acacia's approximate 55% ownership interest in these properties for $7,900. The $7,900 represents a return of Acacia's original investment, plus approximately $1,400. Using the original acquisition capitalization rates for these properties, Essex estimates that The Shores and Bristol Commons have appreciated to over $9,000 since their time of acquisition. Concurrent with the purchase of Acacia's ownership interest, these properties, their underlying debt and their operations have been consolidated into the Company's financial statements. The debt consolidated into the balance sheet consists of an $18,520, 7.25% fixed Page 8 of 77 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1997 AND 1996 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) rate loan secured by The Shores, due in December 2000, and a $12,298, 7.54% fixed rate loan, with interest fixed pursuant to an interest rate swap agreement, secured by Bristol Commons and due in June 2002. Subsequent to March 31, 1997, the Company repaid the loan secured by the Bristol Commons property with a portion of the proceeds from its sale of 2,000,000 shares of Common Stock to Cohen & Steers. (iv) On February 27, 1997, the Company acquired Foothill Apartments and Twin Creek Apartments, adding 176 units to the Company's portfolio. These properties are located in San Ramon, California, and were purchased together for an aggregate contract price of $19,166. These communities each feature a swimming pool and spa. These first quarter 1997 acquisitions were funded with proceeds from the Company's December 1996 follow-on Common Stock offering. (3) RELATED PARTY TRANSACTIONS -------------------------- All general and administrative expenses of the Company and Essex Management Corporation ("EMC") are initially borne by the Company, with a portion subsequently allocated to EMC. Expenses allocated to EMC for the three months ended March 31, 1997 totaled $293 and are reflected as a reduction in general and administrative expenses in the accompanying consolidated statements of operations. Rental income in the accompanying consolidated statements of operations includes related party rents earned from space leased to The Marcus & Millichap Company ("M&M"), including operating expense reimbursement, of $171 and $170 for the three months ended March 31, 1997 and 1996, respectively. Other income for the three months ended March 31, 1997 includes interest income of $393 which was earned principally under notes receivable from Essex Fidelity I Corporation, the partnerships which collectively own Anchor Village, a 301 unit multifamily property located in Mukilteo, Washington ("Anchor Village"), the partnerships which collectively own Highridge Apartments, a 255 unit multifamily property located in Rancho Palos Verde, California ("Highridge") and the partnerships which collectively own an approximate 30.7% minority interest in Pathways Apartments, a 296 unit multifamily property located in Long Beach, California ("Pathways"). For the three months ended March 31, 1997 the Company earned $29 of dividend income from EMC. In addition, Essex earned management fee income of $88 for the three months ended March 31, 1997, from Anchor Village, Highridge and Pathways. EMC provided property management services to the Company's neighborhood shopping centers. The fees paid by the Company for such services for the three months ended March 31, 1997 was $30, and is included in administrative expense in the accompanying consolidated statements of operations. Page 9 of 77 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1997 AND 1996 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Notes and other related party receivables as of March 31, 1997 and December 31, 1996 consist of the following: March 31, December 31, 1997 1996 -------- -------- Notes receivable from Fidelity I and Sacramento, secured, bearing interest at 9%, due on demand $ - $ 718 Notes receivable from Fidelity I and JSV, secured, bearing interest at 9.5%-10%, due 2015 726 726 Note receivable from Anchor Village, secured, bearing interest at 8%, due January 14, 1998 9,650 - Note receivable from Highridge, secured, bearing interest at 9.375%, due August 1, 1997 12,489 - Other related party receivables, substantially due on demand 941 918 -------- -------- $ 23,806 $ 2,362 ======== ======== Other related party receivables consist primarily of unreimbursed expenses due from EMC and accrued interest income on related party notes receivables. (4) EARNINGS PER SHARE ------------------ The Company will adopt the provisions of The Statement of Financial Accounting Standard No. 128 (SFAS128), Earnings Per Share, for ------------------ financial statements with periods ending after December 15, 1997. Earlier application is not permitted. After the effective date, all prior period earnings per share data presented will be restated to conform with the provisions of SFAS128. Had the Company applied the provisions of SFAS128 to the unaudited financial statements for the period ending March 31, 1997, the effect on earnings per share data would have been immaterial. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATION -------------------- The following discussion is based primarily on the consolidated financial statements of Essex Property Trust, Inc. ("Essex" or the "Company") as of March 31, 1997 and 1996 and for the three months ended March 31, 1997 and 1996. This information should be read in conjunction with the accompanying condensed consolidated financial statements and notes thereto. These financial statements include all adjustments which are, in the opinion of management, necessary to reflect a fair statement of the results and all such adjustments are of a normal recurring nature. Page 10 of 77 Substantially all of the assets of Essex are held by, and substantially all operations conducted through, Essex Portfolio, L.P. (the "Operating Partnership"). Essex is the sole general partner of the Operating Partnership and, as of March 31, 1997 and 1996, owned 88.0% and 77.2% general partnership interest in the Operating Partnership, respectively. The Company qualifies as a real estate investment trust (a "REIT") for Federal income tax purposes. Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in the quarterly report on Form 10-Q which are not historical facts may be considered "forward-looking statements", within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors including, but not limited to, those risks and special consideration set forth in Essex's other filings with the Securities and Exchange Commission (the "SEC") which may cause the actual results, performance or achievements of Essex to be materially different from any further results, performance or achievements expressed or implied by such forward-looking statements. GENERAL BACKGROUND Essex's revenues are generated primarily from multifamily residential, retail and commercial property operations, which accounted for 95% and 97% of its revenues for the three months ended March 31, 1997 and 1996, respectively. Essex's Properties (the "Properties") are located in California, Oregon and Washington. Occupancy levels of Essex's multifamily residential properties in these markets have generally remained high (averaging over 95% for the last five years). Essex elects to be treated as a real estate investment trust ("REIT")for Federal income tax purposes, commencing with the year ending December 31, 1994. In order to maintain compliance with REIT tax rules, Essex provides fee-based asset management and disposition services as well as third-party property management and leasing services through Essex Management Corporation ("EMC"). Essex owns 100% of EMC's 19,000 shares of non-voting Preferred Stock. Executives of Essex own 100% of EMC's 1,000 shares of Common Stock. Essex has been actively engaged in the business of acquiring and managing portfolios of non-performing assets along with institutional investors. Asset management services resulting from these portfolios are provided by EMC, typically for the term that is required to acquire, reposition and dispose of the portfolio. Asset management agreements usually provide for a base management fee calculated as a percentage of the gross asset value of the portfolio under management, and an incentive fee based upon the overall financial performance of the portfolio. Accordingly, the fees earned as a result of these contracts fluctuate as assets are acquired and disposed of. Essex benefits from such fees indirectly through receipt of preferred stock dividend and by allocation of related expenses to EMC. In general, Essex believes, however, that there will be limited opportunities to acquire portfolios of non-performing assets in the future. Since the Company's IPO in June 1994, the Company has acquired ownership interest in twenty multifamily residential properties, twelve in California, seven in Washington and one in Oregon, consisting of a total of 3,947 units for an aggregate total capitalized cost of approximately $261.1 million. As part of its active portfolio management strategy, the Company has sold, since its IPO, four multifamily residential properties in Northern California consisting of a total of 442 units, at an aggregate gross sales price of approximately $26.9 million resulting in a net aggregate gain of approximately $8.7 million. Page 11 of 77 Average financial occupancy rates of the Company's multifamily properties on a same-property basis increased to 97.0% from 96.9%, for the three months ended March 31, 1997 and 1996, respectively. The regional breakdown is as follows: March 31, March 31, 1997 1996 --------- --------- Northern California 96.9% 98.6% Seattle Metropolitan 97.6% 95.0% Southern California 95.3% 96.9% The Company's retail and commercial properties were 98% occupied (based on square footage) as of March 31, 1997. RESULTS OF OPERATIONS Comparison of the Three Months Ended March 31, 1997 to the Three Months Ended - ----------------------------------------------------------------------------- March 31, 1996. - -------------- Total Revenues increased by $6,997,000 or 60.6% to $18,551,000 in the first - -------------- quarter of 1997 from $11,554,000 in the first quarter of 1996. The following table sets forth a breakdown of these revenue amounts, including the revenues attributable to properties that Essex for all of both the quarters ended March 31, 1997 and 1996 ("Same Store Properties") owned. Three Months Ended March 31, --------------- Dollar Percentage 1997 1996 Change Change ------ ------ ------ ---------- Number of Properties Rental income ---------- Same Store Properties Northern California 8 $ 4,834 $ 4,304 $ 530 12.3% Seattle Metropolitan 9 3,807 3,530 277 7.9 Southern California 2 1,199 1,187 12 1.0 Retail and commercial 7 1,257 1,199 58 4.8 -------- ------- ------- ------ ----- Total Same Store Properties 26 11,097 10,220 877 8.6 ======== Properties acquired/ disposed of subsequent to January 1, 1996 6,259 731 5,528 757.0 ------- ------- ------ ----- Total rental income 17,356 10,951 6,405 58.5 Other income 1,195 603 592 98.2 ------- ------- ------ ----- Total revenues $18,551 $11,554 $6,997 60.6% ======= ======= ====== ===== As set forth in the above table, $5,528,000 of the $6,997,000 increase in total revenues is attributable to properties acquired or disposed of subsequent to January 1, 1996. During this period, Essex acquired 13 multifamily properties (the "Acquisition Properties"), and disposed of 2 multifamily properties (the "Disposition Properties"). Of the increase in total revenues, $877,000 is attributable to increases in rental income from the Same Store Properties. Rental income from the Same Store Properties increased by approximately 8.6% to $11,097,000 in the first quarter of 1997 from $10,220,000 in the first quarter of 1996. A significant portion of this increase was attributable to the eight multifamily Same Store Properties located in Northern California, the rental income of which increased by $530,000 or 12.3% to $4,834,000 in the first quarter of 1997 from $4,304,000 in the first quarter of 1996. The $530,000 increase, is primarily attributable to rental rate increases as offset by a decrease in financial occupancy to 96.9% from 98.6% for the quarter ended March 31, 1997 and 1996, respectively. In addition the nine multifamily residential properties located in Page 12 of 77 Seattle, significantly contributed towards this Same Store Properties rental income increase. The rental income of these properties increased by $277,000 or 7.9% to $3,807,000 in the first quarter of 1997 from $3,530,000 in the first quarter of 1996. Of the $277,000 increase, $187,000 is attributable to rental rate increases with the remainder primarily attributable to an increase in financial occupancy to 97.6% from 95% for the quarter ended March 31, 1997 and 1996, respectively. The increases in total revenue also reflected an increase of $592,000 attributable to other income, which includes an increase in interest income of $449,000. Total Expenses increased by $3,452,000 or approximately 36.9% to $12,808,000 in - -------------- the first quarter of 1997 from $9,356,000 in the first quarter of 1996. Interest expense increased by $462,000 or 15.9% to $3,363,000 in the first quarter of 1997 from $2,901,000 in the first quarter of 1996. Such interest expense increase was primarily due to the net addition of outstanding mortgage debt in connection with property and investment acquisitions. Property operating expenses, exclusive of depreciation and amortizations increased by $2,112,000 or 58.6% to $5,714,000 in the first quarter of 1997 from $3,602,000 in the first quarter of 1996. Of such increase, $2,017,000 was attributable to Properties acquired or disposed of in 1996 and 1997. General and administrative expenses represents the costs of Essex's various acquisition and administrative departments as well as partnership administration and non-operating expenses. Such expenses increased by $119,000 in the first quarter of 1997 from the amount for the first quarter of 1996. This increase is largely due to additional staffing requirements resulting from the growth of Essex. Net income increased by $4,925,000 to $4,868,000 in the first quarter of 1997 - ---------- from ($57,000) in the first quarter of 1996. The first quarter 1996 results included a charge for extraordinary item of $2,180,000. The remaining increase in net income was primarily a result of the net contribution of the Acquisition Properties as offset by the Disposition Properties, and increase in net operating income from the Same Store Properties. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1997, Essex had $8,298,000 of unrestricted cash and cash equivalents. On March 31, 1997 Essex recorded a receivable for the sale of Common Stock to Cohen & Steers of $58,250,000. These proceeds were received on April 3, 1997. The Company expects to meet its short-term liquidity requirements by using this working capital, the proceeds from the above mentioned sale of Common Stock, the proceeds from the anticipated sale of Convertible Preferred Stock, amounts available on lines of credit, and any portion of net cash flow from operations not currently distributed. The Company believes that its future net cash flows will be adequate to meet operating requirements and to provide for payment of dividends by the Company in accordance with REIT requirements. Essex has credit facilities in the committed amount of approximately $63,820,000. At March 31, 1997 Essex had $34,420,000 outstanding on its lines of credit, with interest rates during the first quarter of 1997 ranging from 7.2% to 7.5%. Subsequent to the quarter ended March 31, 1997, the Company repaid its outstanding lines of credit balance with a portions of the proceeds from the sale of 2,000,000 shares to Cohen & Steers. Essex's total cash balances decreased $33,983,000 from $46,899,000 as of December 31, 1996 to $12,916,000 as of March 31, 1997. This decrease was a result of $51,881,000 of cash used in investing activities, which was offset by $12,674,000 of cash provided by operating activities, and $5,224,000 of cash provided by financing activities. Of the $51,881,000 net cash used in investing activities, $51,032,000 was used to purchase and upgrade rental properties. The $5,224,000 net cash provided by financing activities was primarily a result of $34,420,000 of proceeds from lines of credit and other notes payable as offset by $665,000 of repayments of mortgages, other notes payable and lines of credit, $22,805,000 issued in notes receivable and $6,289,000 of dividends/distributions paid. As of March 31, 1997, Essex's combined outstanding indebtedness under mortgages and lines of credit consisted of $140,538,000 in fixed rate debt, $42,820,000 of debt represented by tax exempt variable rate demand bonds, of which $29,220,000 is capped at a maximum interest rate of 7.2%, and $34,420,000 of debt which has an interest rate based on The Internal Banking Offshore Rate ("IBOR"). Page 13 of 77 Essex expects to incur approximately $300 per weighted average occupancy unit in non-revenue generating capital expenditures for the year ended December 31, 1997. These expenditures do not include the improvements required in connection with Northwestern Mutual and John Hancock mortgage loans and renovation expenditures required pursuant to tax-exempt bond financings. Essex expects that cash from operations and/or the lines of credit will fund such expenditures. Essex pays quarterly dividends from cash available for distribution. Until it is distributed, cash available for distribution is invested by the Company primarily in short-term investment grade securities or is used by the Company to reduce balances outstanding under its lines of credit. On August 20, 1996, Essex completed the sale of 2,530,000 shares of its Common Stock through an underwritten public offering at a price of $22.75 per share. The net proceeds were used primarily to fund property acquisitions. In September 1996, Essex completed the sale of $20 million of its 8.75% Convertible Preferred Stock, Series 1996A (the "Convertible Preferred Stock") to Tiger/Westbrook Real Estate Fund, L.P., and Tiger/Westbrook Real Estate Co-Investment Partnership, L.P. (collectively "Tiger/Westbrook"). Essex may require Tiger/Westbrook to purchase up to an additional $20 million of Convertible Preferred Stock at any time prior to June 20, 1997. On December 24, 1996, Essex completed the sale of 2,783,000 shares of its Common Stock through an underwritten public offering at a price of $27.75 per share. The net proceeds were used primarily to fund property acquisitions. On March 31, 1997, pursuant to its existing shelf registration statement, Essex completed the sale of 2,000,000 shares of its Common Stock to Cohen & Steers at a price of $29.125 per share. The net proceeds will be used primarily to reduce debt and acquire additional multifamily properties. After the completion of this sale, Essex has the capacity pursuant to its shelf registration statement to issue up to approximately $144 million of equity securities. The Company will utilize the proceeds from public offerings of shares of Common Stock, availability under its lines of credit, and cash balances to fund its future property acquisition and development activities. Essex expects to meet certain long-term liquidity requirements such as scheduled debt maturities and repayment of short-term financing of acquisition and development activities through the issuance of long-term secured and unsecured debt and offerings by Essex of additional equity securities (or limited partnership interests in the Operating Partnership). FUNDS FROM OPERATIONS Industry analysts generally consider Funds from Operations an appropriate measure of performance of an equity REIT. Generally, Funds from Operations adjusts the net income of equity REITs for non-cash charges such as depreciation and amortization and non-recurring gains or losses. Management generally considers Funds from Operations to be a useful financial performance measurement of an equity REIT because, together with net income and cash flows, Funds from Operations provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures. Funds from Operations does not represent net income or cash flows from operations as defined by GAAP and does not necessarily indicate that cash flows will be sufficient to fund cash needs. It should not be considered as an alternative to net income as an indicator of the Operating Partnership's operating performance or to cash flows as a measure of liquidity. Funds from Operations does not measure whether cash flow is sufficient to fund all cash needs including principal amortization, capital improvements and distributions to shareholders. Funds from Operations also does not represent cash flows generated from operating, investing or financing activities as defined under GAAP. Further, Funds from Operations as disclosed by other REITs may not be comparable to the Company's calculation of Funds from Operations. Page 14 of 77 The following table sets forth Essex's calculation of Funds from Operations for the quarters ended March 31, 1997 and 1996.
Three months ended ---------------------------------------- March 31, 1997 March 31, 1996 ----------------- ----------------- Net Income before minority interest and extraordinary item $ 5,743,000 $ 2,198,000 Adjustments: Depreciation & Amortization 3,088,000 2,190,000 Adjustment for Unconsolidated Joint Venture - 119,000 Non-recurring Items, loss from hedge termination - 21,000 Minority Interest - Pathways (138,000) (140,000) ----------- ----------- Funds from Operations $ 8,693,000 $ 4,388,000 =========== =========== Weighted average number of shares outstanding-fully diluted (1) 14,557,019 8,130,000 ========== ===========
(1) Assumes conversion of all outstanding shares of Convertible Preferred Stock and operating partnership interests in the Operating Partnership into shares of Essex's common stock. The National Association of Real Estate Investment Trust ("NAREIT"), a leading industry trade group, has approved a revised definition of Funds from Operations, which provides that the amortization of deferred financing costs is no longer added back to net income to calculate Funds from Operations. Essex adopted the revised NAREIT definition of Funds from Operations as of January 1, 1996. Page 15 of 77 ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS -------- Page ---- 10.1 Phantom Stock Unit Agreement for Mr. Guericke 18 10.2 Phantom Stock Unit Agreement for Mr. Schall 25 10.3 Replacement Promissory Note (April 15, 1996) and Pledge Agreement for Mr. Guericke 32 10.4 Promissory Note (December 31, 1996) and Pledge Agreement for Mr. Guericke 43 10.5 Replacement Promissory Note (April 30, 1996) and Pledge Agreement for Mr. Schall 54 10.6 Promissory Note (December 31, 1996) and Pledge Agreement for Mr. Schall 65 11.1 Statements regarding Computation of Earnings per Share 76 12.1 Schedule of Computation of Ratio of Earnings to Fixed Charges 77 27.1 Article 5 Financial Data Schedule (EDGAR Filing Only). -- B. REPORTS ON FORM 8-K ------------------- On April 3, 1997, Essex filed a current report on Form 8-K, regarding its sale of 2,000,000 shares Common Stock pursuant to its Shelf Registration Statement. Page 16 of 77 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ESSEX PROPERTY TRUST, INC. /s/ Mark J. Mikl ---------------------------- Mark J. Mikl, Controller (Principal Accounting Officer) May 13, 1997 ---------------------------- Date Page 17 of 77 EX-10.1 2 PHANTOM STOCK UNIT AGMT FOR MR. GUERICKE EXHIBIT 10.1 ESSEX PROPERTY TRUST, INC. PHANTOM STOCK UNIT AGREEMENT THIS AGREEMENT is entered into as of January 1, 1997 between the Company and Recipient. WI T N E S S E T H: WHEREAS, the Company has determined that it would be to the advantage and in the interests of the Company and its stockholders to grant to Recipient the Phantom Stock Units provided for in this agreement; NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties to this agreement hereby agree as follows: 1. Definitions. Capitalized terms in this agreement shall have the ----------- following defined meanings: (a) "Affiliate" shall have the meaning ascribed to such term in --------- Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended. (b) "Board" means the Board of Directors of the Company. ----- (c) "Change in Control" means (i) the acquisition by stockholders ----------------- acting as a group (other than an acquisition from the Company or by the Company, the management of the Company or a Company-sponsored employee benefit plan) of twenty percent (20%) or more of the outstanding Stock; (ii) during any calendar year individuals who at the beginning of the year constitute the Board (together with any new director whose election by the Board or whose nomination for election by the Company's stockholders was approved by a vote of the majority of the directors then still in office who either were directors at the beginning of the calendar year or whose election or nomination was previously so approved) cease for any reason to constitute at least a majority thereof; (iii) the approval by the Company's stockholders of a reorganization, merger, consolidation, sale or disposition of all or substantially all of the assets of the Company; or (iv) the approval by the Company's stockholders of a complete liquidation or dissolution of the Company. (d) "Committee" means any committee appointed by the Board to --------- administer this agreement and if no committee is so appointed then each reference herein to the Committee shall refer to the Board. (e) "Company" means Essex Property Trust, Inc. ------- (f) "Disability" means the Recipient's inability to properly ---------- perform his employment or consulting duties by reason of any medically determinable physical or Page 18 of 77 mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. (g) "Fair Market Value" means, as of any date, the value of the ----------------- Stock determined as follows: (i) Where there exists a public market for the Stock, the Fair Market Value shall be (A) the closing sales price for a share of Stock for the last market trading day prior to the time of the determination (or, if no sales were reported on that date, on the last trading date on which sales were reported) on the New York Stock Exchange, the Nasdaq National Market or the principal securities exchange on which the Stock is listed for trading, whichever is applicable or (B) if the Stock is not traded on any such exchange or national market system, the average of the closing bid and asked prices of a share of Stock on the Nasdaq Small Cap Market, in each case, as reported in The Wall Street Journal or such other source as the Committee deems reliable; or (ii) In the absence of an established market of the type described in (i), above, for the Stock, the Fair Market Value thereof shall be determined by the Committee in good faith, and such determination shall be conclusive and binding on all persons. (h) "Recipient" means Keith R. Guericke. --------- (i) "Stock" means common stock of the Company. ----- (j) "Termination Date" means January 1, 2002, the fifth (5th) ---------------- anniversary of Vesting Commencement Date. (k) "Vesting Commencement Date" means January 1, 1997. ------------------------- 2. Phantom Stock Unit Award. The Company hereby awards Recipient ------------------------ seven thousand six hundred sixty (7,660) Phantom Stock Units, which shall be credited to a Phantom Stock Unit Account maintained for Recipient. Subject to Section 10, each Phantom Stock Unit shall be deemed to be equivalent in value to one share of Stock. 3. Dividends. Effective as of the payment date for each cash --------- dividend on the Stock, the Company shall pay to Recipient cash equal to the product of (i) the number of Phantom Stock Units, and fractions thereof, held in Recipient's Phantom Stock Unit Account on the record date for such dividend, and (ii) the dollar value of the dividend paid upon a single share of Stock. 4. Stock Dividends. Effective as of the payment date (following the --------------- Vesting Commencement Date) for each stock dividend on the Stock, additional Phantom Stock Units shall be credited to Recipient's Phantom Stock Account as of the record date for such dividend. Page 19 of 77 The number of additional Phantom Stock Units that shall be credited to Recipient's Phantom Stock Unit Account shall equal the number of shares of Stock, and fractions thereof, that Recipient would have received as Stock dividends had he been the owner on the record date for such Stock dividend of the number of shares of Stock equal to the number of Phantom Stock Units held in Recipient's Phantom Stock Unit Account on such record date. 5. Vesting. The Phantom Stock Units credited from time to time to ------- Recipient's Phantom Stock Unit Account shall vest in accordance with the following schedule: (a) 10% of the number of Phantom Stock Units then credited to Recipient's Phantom Stock Unit Account will vest on January 1, 1999. (b) 50% of the number of Phantom Stock Units then credited to Recipient's Phantom Stock Unit Account (inclusive of previously vested Phantom Stock Units) will vest on January 1, 2000. (c) 80% of the number of Phantom Stock Units then credited to Recipient's Phantom Stock Unit Account (inclusive of previously vested Phantom Stock Units) will vest on January 1, 2001. (d) All remaining Phantom Stock Units credited to Recipient's Phantom Stock Unit Account will vest on January 1, 2002. 6. Redemption of Vested Phantom Stock Units. As soon as practicable ---------------------------------------- following the Termination Date, the Company shall issue to Recipient the number of shares of Stock that equals the number of Phantom Stock Units, and fractions thereof, credited to Recipient's Phantom Stock Unit Account as of the Termination Date, or at the option of the Committee, the Company shall pay cash to Recipient equivalent to the Fair Market Value, determined as of the Termination Date, of all or a portion of the number of shares of Stock represented by the number of Phantom Stock Units, and fractions thereof, credited to Recipient's Phantom Stock Unit Account as of the Termination Date. 7. Redemption upon Change in Control. Notwithstanding the foregoing, --------------------------------- in the event of a Change in Control, all Phantom Stock Units credited to Recipient's Phantom Stock Unit Account immediately prior to the specified effective date of the Change in Control shall be fully vested and nonforfeitable. Immediately prior to the specified effective date of a Change in Control, the Company shall issue to Recipient the number of shares of Stock that equals the number of Phantom Stock Units, and fractions thereof, credited to Recipient's Phantom Stock Unit Account as of that date, or at the option of the Committee, the Company shall pay cash to Recipient equivalent to the Fair Market Value, determined as of that date, of all or a portion of the number of shares of Stock represented by the number of Phantom Stock Units, and fractions thereof, credited to Recipient's Phantom Stock Unit Account as of that date. Page 20 of 77 8. Limits on Phantom Stock Unit Vesting. The vesting of the Phantom ------------------------------------ Stock Units awarded hereunder may end before the Termination Date, as follows: (a) If Recipient voluntarily ceases to be an employee or consultant of the Company or an Affiliate during the term of this agreement, all Phantom Stock Units credited to Recipient's Phantom Stock Unit Account which have not vested in accordance with Section 5, above, shall be forfeited and Recipient shall not thereafter receive any of the benefits provided for in this agreement attributable to those forfeited Phantom Stock Units. Recipient shall not be deemed to have voluntarily ceased to be an employee or consultant of the Company or an Affiliate in the event Recipient terminates such employment or consulting relationship due to (i) death, (ii) Disability, (iii) a reduction in Recipient's compensation then in effect, other than a reduction comparable to reductions generally applicable to similarly situated employees or consultants of the Company or an Affiliate, as the case may be, or (iv) a material and adverse change in Recipient's position, duties, responsibilities or status with the Company or an Affiliate. (b) If during the term of this agreement, Recipient ceases to be a bona fide employee or consultant of the Company or an Affiliate for any reason other than Recipient's voluntary termination of such employment or consulting relationship, Recipient shall continue to vest in the Phantom Stock Units in accordance with Section 5, above, and shall be entitled to receive on the Termination Date all of the cash and/or shares of Stock attributable to the Phantom Stock Units credited to Recipient's Phantom Stock Unit Account as of the Termination Date. (c) If during the term of this agreement, Recipient dies while serving as an employee or consultant of the Company or an Affiliate, Recipient's estate or the person or persons to whom Recipient's rights under this agreement shall pass by will or the applicable laws of descent and distribution shall be entitled to receive on the Termination Date all of the cash and/or shares of Stock attributable to the Phantom Stock Units credited to Recipient's Phantom Stock Unit Account as of the Termination Date. Following Recipient's death, the Phantom Stock Units credited to Recipient's Phantom Stock Unit Account from time to time shall continue to vest in accordance with Section 5, above. (d) If Recipient is on a leave of absence from the Company or an Affiliate because of his or her Disability, or for the purpose of serving the government of the country in which the principal place of employment of Recipient is located, either in a military or civilian capacity, or for such other purpose or reason as the Committee may approve, Recipient shall not be deemed during the period of such absence, by virtue of such absence alone, to have terminated employment or a consulting relationship with the Company or an Affiliate except as the Committee may otherwise expressly provide. During Recipient's leave of absence, the Phantom Stock Units credited to Recipient's Phantom Stock Unit Account from time to time shall continue to vest in accordance with Section 5, above. Page 21 of 77 9. Issuance of Stock Certificates. As soon as practicable following ------------------------------ redemption of any Phantom Stock Units for shares of Stock, the Company shall, without transfer or issue tax and without other incidental expense to Recipient, deliver to Recipient at the office of the Company, attention of the Secretary, or such other place as may be mutually acceptable to the Company and Recipient, a certificate or certificates of such shares of Stock; provided; however, that such delivery may be postponed by the Company for such period as may be required for it with reasonable diligence to comply with applicable registration requirements under the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, any applicable listing requirements of any national securities exchange, and requirements under any other law or regulation applicable to the issuance or transfer of such shares. Recipient (and Recipient's spouse, if any) shall be required, as a condition precedent to acquiring such shares, to execute one or more agreements relating to obligations in connection with ownership of the Stock or restrictions on transfer of the Stock no less restrictive than the obligations and restrictions to which other stockholders of the Company are subject at the time of such redemption. 10. Adjustments. If there should be any change in a class of Stock, ----------- through merger, consolidation, reorganization, recapitalization, reincorporation, stock split, or other change in the corporate structure of the Company, the Company may make appropriate adjustments in order to preserve, but not to increase, the benefits to Recipient, including adjustments of the number of Phantom Stock Units subject to this agreement. 11. Limitations on Transfer. The proceeds upon redemption of Phantom ----------------------- Stock Units awarded hereunder shall, during Recipient's lifetime, be payable only to Recipient, and neither this agreement nor any right hereunder shall be transferable by Recipient by operation of law or otherwise other than by will or the laws of descent and distribution. In the event of any attempt by Recipient to alienate, assign, pledge, hypothecate, or otherwise dispose of any right hereunder, except as provided for in this agreement, or in the event of the levy of any attachment, execution, or similar process upon the rights or interest hereby conferred, the Company at its election may terminate this agreement by notice to Recipient and this agreement and the Phantom Stock Units issued hereunder shall thereupon become null and void. 12. No Stockholder Rights. Neither Recipient nor any person entitled --------------------- to exercise Recipient's rights in the event of his death shall have any of the rights of a stockholder with respect to the Phantom Stock Units subject to this agreement, including without limitation, any dividend or voting rights (except as provided in Sections 3 and 4, above), except to the extent any certificates for Stock shall have been issued upon redemption of the Phantom Stock Units. 13. No Funding. This agreement constitutes a mere promise by the ---------- Company to make payments and issue Stock in the future in accordance with its terms. Recipient has the status of a general unsecured creditor of the Company. Any cash payment will be paid from the general assets of the Company and nothing in this agreement will be construed to give Recipient or any other person rights to any specific assets of the Company. In all events, it is the intention of the Company and Recipient that the agreement be treated as unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended. Page 22 of 77 14. No Effect On Terms Of Employment or Consulting Relationship. ----------------------------------------------------------- SUBJECT TO THE TERMS OF ANY WRITTEN EMPLOYMENT OR CONSULTING CONTRACT TO THE CONTRARY, THE COMPANY OR AN AFFILIATE SHALL HAVE THE RIGHT TO TERMINATE OR CHANGE THE TERMS OF EMPLOYMENT OR CONSULTING RELATIONSHIP OF RECIPIENT AT ANY TIME AND FOR ANY REASON WHATSOEVER, WITH OR WITHOUT CAUSE. 15. Notice. Any notice required to be given under the terms of this ------ agreement shall be addressed to the Company in care of its Secretary at the Office of the Company at 777 California Avenue, Palo Alto, California 94304, and any notice to be given to Recipient shall be addressed to him at the address given by him beneath his signature to this agreement, or such other address as either party to this agreement may hereafter designate in writing to the other. Any such notice shall be deemed to have been duly given when enclosed in a properly sealed envelope or wrapper addressed as aforesaid, registered or certified and deposited (postage or registration or certification fee prepaid) in a post office or branch post office regularly maintained by the United States. 16. Committee Decisions Conclusive. All decisions of the Committee ------------------------------ upon any question arising under this agreement shall be conclusive. 17. Successors. This agreement shall be binding upon and inure to ---------- the benefit of any successor or successors of the Company. Where the context permits, "Recipient " as used in this agreement shall include Recipient's executor, administrator, personal representative or other legal representative or the person or persons to whom Recipient's rights pass by will or the applicable laws of descent and distribution. 18. Withholding. Recipient agrees to satisfy in cash, a certified ----------- check, bank draft, or postal or express money order payable to the order of the Company in lawful money of the United States at the time of redemption of Phantom Stock Units awarded hereunder any applicable federal, foreign, state or local income tax or employment tax withholding obligation of the Company or Recipient's employer. The Committee, in its discretion, may permit the Company or Recipient's employer to satisfy its withholding obligations by withholding from Recipient cash or shares of Stock payable hereunder having a Fair Market Value sufficient to satisfy any applicable federal, foreign, state or local income or employment tax withholding obligation. Page 23 of 77 19. California Law. The interpretation, performance and enforcement -------------- of this agreement shall be governed by the laws of the State of California. IN WITNESS WHEREOF, the Company and Recipient have executed this agreement as of the day and year first above written. Essex Property Trust, Inc. By: /s/ Michael J. Schall ------------------------------------------ Michael J. Schall, Chief Financial Officer /s/ Keith R. Guericke ------------------------------------------ Keith R. Guericke c/o Essex Property Trust, Inc. 777 California Avenue Palo Alto, CA 94304 Page 24 of 77 EX-10.2 3 PHANTOM STOCK UNIT AGMT FOR MR. SCHALL EXHIBIT 10.2 ESSEX PROPERTY TRUST, INC. PHANTOM STOCK UNIT AGREEMENT THIS AGREEMENT is entered into as of January 1, 1997 between the Company and Recipient. WI T N E S S E T H: WHEREAS, the Company has determined that it would be to the advantage and in the interests of the Company and its stockholders to grant to Recipient the Phantom Stock Units provided for in this agreement; NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties to this agreement hereby agree as follows: 1. Definitions. Capitalized terms in this agreement shall have the ----------- following defined meanings: (a) "Affiliate" shall have the meaning ascribed to such term in --------- Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended. (b) "Board" means the Board of Directors of the Company. ----- (c) "Change in Control" means (i) the acquisition by stockholders ----------------- acting as a group (other than an acquisition from the Company or by the Company, the management of the Company or a Company-sponsored employee benefit plan) of twenty percent (20%) or more of the outstanding Stock; (ii) during any calendar year individuals who at the beginning of the year constitute the Board (together with any new director whose election by the Board or whose nomination for election by the Company's stockholders was approved by a vote of the majority of the directors then still in office who either were directors at the beginning of the calendar year or whose election or nomination was previously so approved) cease for any reason to constitute at least a majority thereof; (iii) the approval by the Company's stockholders of a reorganization, merger, consolidation, sale or disposition of all or substantially all of the assets of the Company; or (iv) the approval by the Company's stockholders of a complete liquidation or dissolution of the Company. (d) "Committee" means any committee appointed by the Board to --------- administer this agreement and if no committee is so appointed then each reference herein to the Committee shall refer to the Board. (e) "Company" means Essex Property Trust, Inc. ------- (f) "Disability" means the Recipient's inability to properly ---------- perform his employment or consulting duties by reason of any medically determinable physical or Page 25 of 77 mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. (g) "Fair Market Value" means, as of any date, the value of the ----------------- Stock determined as follows: (i) Where there exists a public market for the Stock, the Fair Market Value shall be (A) the closing sales price for a share of Stock for the last market trading day prior to the time of the determination (or, if no sales were reported on that date, on the last trading date on which sales were reported) on the New York Stock Exchange, the Nasdaq National Market or the principal securities exchange on which the Stock is listed for trading, whichever is applicable or (B) if the Stock is not traded on any such exchange or national market system, the average of the closing bid and asked prices of a share of Stock on the Nasdaq Small Cap Market, in each case, as reported in The Wall Street Journal or such other source as the Committee deems reliable; or (ii) In the absence of an established market of the type described in (i), above, for the Stock, the Fair Market Value thereof shall be determined by the Committee in good faith, and such determination shall be conclusive and binding on all persons. (h) "Recipient" means Michael J. Schall. --------- (i) "Stock" means common stock of the Company. ----- (j) "Termination Date" means January 1, 2002, the fifth (5th) ---------------- anniversary of Vesting Commencement Date. (k) "Vesting Commencement Date" means January 1, 1997. ------------------------- 2. Phantom Stock Unit Award. The Company hereby awards Recipient ------------------------ five thousand six hundred seventeen (5,617) Phantom Stock Units, which shall be credited to a Phantom Stock Unit Account maintained for Recipient. Subject to Section 10, each Phantom Stock Unit shall be deemed to be equivalent in value to one share of Stock. 3. Dividends. Effective as of the payment date for each cash --------- dividend on the Stock, the Company shall pay to Recipient cash equal to the product of (i) the number of Phantom Stock Units, and fractions thereof, held in Recipient's Phantom Stock Unit Account on the record date for such dividend, and (ii) the dollar value of the dividend paid upon a single share of Stock. 4. Stock Dividends. Effective as of the payment date (following the --------------- Vesting Commencement Date) for each stock dividend on the Stock, additional Phantom Stock Units shall be credited to Recipient's Phantom Stock Account as of the record date for such dividend. Page 26 of 77 The number of additional Phantom Stock Units that shall be credited to Recipient's Phantom Stock Unit Account shall equal the number of shares of Stock, and fractions thereof, that Recipient would have received as Stock dividends had he been the owner on the record date for such Stock dividend of the number of shares of Stock equal to the number of Phantom Stock Units held in Recipient's Phantom Stock Unit Account on such record date. 5. Vesting. The Phantom Stock Units credited from time to time to ------- Recipient's Phantom Stock Unit Account shall vest in accordance with the following schedule: (a) 10% of the number of Phantom Stock Units then credited to Recipient's Phantom Stock Unit Account will vest on January 1, 1999. (b) 50% of the number of Phantom Stock Units then credited to Recipient's Phantom Stock Unit Account (inclusive of previously vested Phantom Stock Units) will vest on January 1, 2000. (c) 80% of the number of Phantom Stock Units then credited to Recipient's Phantom Stock Unit Account (inclusive of previously vested Phantom Stock Units) will vest on January 1, 2001. (d) All remaining Phantom Stock Units credited to Recipient's Phantom Stock Unit Account will vest on January 1, 2002. 6. Redemption of Vested Phantom Stock Units. As soon as practicable ---------------------------------------- following the Termination Date, the Company shall issue to Recipient the number of shares of Stock that equals the number of Phantom Stock Units, and fractions thereof, credited to Recipient's Phantom Stock Unit Account as of the Termination Date, or at the option of the Committee, the Company shall pay cash to Recipient equivalent to the Fair Market Value, determined as of the Termination Date, of all or a portion of the number of shares of Stock represented by the number of Phantom Stock Units, and fractions thereof, credited to Recipient's Phantom Stock Unit Account as of the Termination Date. 7. Redemption upon Change in Control. Notwithstanding the foregoing, --------------------------------- in the event of a Change in Control, all Phantom Stock Units credited to Recipient's Phantom Stock Unit Account immediately prior to the specified effective date of the Change in Control shall be fully vested and nonforfeitable. Immediately prior to the specified effective date of a Change in Control, the Company shall issue to Recipient the number of shares of Stock that equals the number of Phantom Stock Units, and fractions thereof, credited to Recipient's Phantom Stock Unit Account as of that date, or at the option of the Committee, the Company shall pay cash to Recipient equivalent to the Fair Market Value, determined as of that date, of all or a portion of the number of shares of Stock represented by the number of Phantom Stock Units, and fractions thereof, credited to Recipient's Phantom Stock Unit Account as of that date. Page 27 of 77 8. Limits on Phantom Stock Unit Vesting. The vesting of the Phantom ------------------------------------ Stock Units awarded hereunder may end before the Termination Date, as follows: (a) If Recipient voluntarily ceases to be an employee or consultant of the Company or an Affiliate during the term of this agreement, all Phantom Stock Units credited to Recipient's Phantom Stock Unit Account which have not vested in accordance with Section 5, above, shall be forfeited and Recipient shall not thereafter receive any of the benefits provided for in this agreement attributable to those forfeited Phantom Stock Units. Recipient shall not be deemed to have voluntarily ceased to be an employee or consultant of the Company or an Affiliate in the event Recipient terminates such employment or consulting relationship due to (i) death, (ii) Disability, (iii) a reduction in Recipient's compensation then in effect, other than a reduction comparable to reductions generally applicable to similarly situated employees or consultants of the Company or an Affiliate, as the case may be, or (iv) a material and adverse change in Recipient's position, duties, responsibilities or status with the Company or an Affiliate. (b) If during the term of this agreement, Recipient ceases to be a bona fide employee or consultant of the Company or an Affiliate for any reason other than Recipient's voluntary termination of such employment or consulting relationship, Recipient shall continue to vest in the Phantom Stock Units in accordance with Section 5, above, and shall be entitled to receive on the Termination Date all of the cash and/or shares of Stock attributable to the Phantom Stock Units credited to Recipient's Phantom Stock Unit Account as of the Termination Date. (c) If during the term of this agreement, Recipient dies while serving as an employee or consultant of the Company or an Affiliate, Recipient's estate or the person or persons to whom Recipient's rights under this agreement shall pass by will or the applicable laws of descent and distribution shall be entitled to receive on the Termination Date all of the cash and/or shares of Stock attributable to the Phantom Stock Units credited to Recipient's Phantom Stock Unit Account as of the Termination Date. Following Recipient's death, the Phantom Stock Units credited to Recipient's Phantom Stock Unit Account from time to time shall continue to vest in accordance with Section 5, above. (d) If Recipient is on a leave of absence from the Company or an Affiliate because of his or her Disability, or for the purpose of serving the government of the country in which the principal place of employment of Recipient is located, either in a military or civilian capacity, or for such other purpose or reason as the Committee may approve, Recipient shall not be deemed during the period of such absence, by virtue of such absence alone, to have terminated employment or a consulting relationship with the Company or an Affiliate except as the Committee may otherwise expressly provide. During Recipient's leave of absence, the Phantom Stock Units credited to Recipient's Phantom Stock Unit Account from time to time shall continue to vest in accordance with Section 5, above. Page 28 of 77 9. Issuance of Stock Certificates. As soon as practicable following ------------------------------ redemption of any Phantom Stock Units for shares of Stock, the Company shall, without transfer or issue tax and without other incidental expense to Recipient, deliver to Recipient at the office of the Company, attention of the Secretary, or such other place as may be mutually acceptable to the Company and Recipient, a certificate or certificates of such shares of Stock; provided; however, that such delivery may be postponed by the Company for such period as may be required for it with reasonable diligence to comply with applicable registration requirements under the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, any applicable listing requirements of any national securities exchange, and requirements under any other law or regulation applicable to the issuance or transfer of such shares. Recipient (and Recipient's spouse, if any) shall be required, as a condition precedent to acquiring such shares, to execute one or more agreements relating to obligations in connection with ownership of the Stock or restrictions on transfer of the Stock no less restrictive than the obligations and restrictions to which other stockholders of the Company are subject at the time of such redemption. 10. Adjustments. If there should be any change in a class of Stock, ----------- through merger, consolidation, reorganization, recapitalization, reincorporation, stock split, or other change in the corporate structure of the Company, the Company may make appropriate adjustments in order to preserve, but not to increase, the benefits to Recipient, including adjustments of the number of Phantom Stock Units subject to this agreement. 11. Limitations on Transfer. The proceeds upon redemption of Phantom ----------------------- Stock Units awarded hereunder shall, during Recipient's lifetime, be payable only to Recipient, and neither this agreement nor any right hereunder shall be transferable by Recipient by operation of law or otherwise other than by will or the laws of descent and distribution. In the event of any attempt by Recipient to alienate, assign, pledge, hypothecate, or otherwise dispose of any right hereunder, except as provided for in this agreement, or in the event of the levy of any attachment, execution, or similar process upon the rights or interest hereby conferred, the Company at its election may terminate this agreement by notice to Recipient and this agreement and the Phantom Stock Units issued hereunder shall thereupon become null and void. 12. No Stockholder Rights. Neither Recipient nor any person entitled --------------------- to exercise Recipient's rights in the event of his death shall have any of the rights of a stockholder with respect to the Phantom Stock Units subject to this agreement, including without limitation, any dividend or voting rights (except as provided in Sections 3 and 4, above), except to the extent any certificates for Stock shall have been issued upon redemption of the Phantom Stock Units. 13. No Funding. This agreement constitutes a mere promise by the ---------- Company to make payments and issue Stock in the future in accordance with its terms. Recipient has the status of a general unsecured creditor of the Company. Any cash payment will be paid from the general assets of the Company and nothing in this agreement will be construed to give Recipient or any other person rights to any specific assets of the Company. In all events, it is the intention Page 29 of 77 of the Company and Recipient that the agreement be treated as unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended. 14. No Effect On Terms Of Employment or Consulting Relationship. ----------------------------------------------------------- SUBJECT TO THE TERMS OF ANY WRITTEN EMPLOYMENT OR CONSULTING CONTRACT TO THE CONTRARY, THE COMPANY OR AN AFFILIATE SHALL HAVE THE RIGHT TO TERMINATE OR CHANGE THE TERMS OF EMPLOYMENT OR CONSULTING RELATIONSHIP OF RECIPIENT AT ANY TIME AND FOR ANY REASON WHATSOEVER, WITH OR WITHOUT CAUSE. 15. Notice. Any notice required to be given under the terms of this ------ agreement shall be addressed to the Company in care of its Secretary at the Office of the Company at 777 California Avenue, Palo Alto, California 94304, and any notice to be given to Recipient shall be addressed to him at the address given by him beneath his signature to this agreement, or such other address as either party to this agreement may hereafter designate in writing to the other. Any such notice shall be deemed to have been duly given when enclosed in a properly sealed envelope or wrapper addressed as aforesaid, registered or certified and deposited (postage or registration or certification fee prepaid) in a post office or branch post office regularly maintained by the United States. 16. Committee Decisions Conclusive. All decisions of the Committee ------------------------------ upon any question arising under this agreement shall be conclusive. 17. Successors. This agreement shall be binding upon and inure to ---------- the benefit of any successor or successors of the Company. Where the context permits, "Recipient " as used in this agreement shall include Recipient's executor, administrator, personal representative or other legal representative or the person or persons to whom Recipient's rights pass by will or the applicable laws of descent and distribution. 18. Withholding. Recipient agrees to satisfy in cash, a certified ----------- check, bank draft, or postal or express money order payable to the order of the Company in lawful money of the United States at the time of redemption of Phantom Stock Units awarded hereunder any applicable federal, foreign, state or local income tax or employment tax withholding obligation of the Company or Recipient's employer. The Committee, in its discretion, may permit the Company or Recipient's employer to satisfy its withholding obligations by withholding from Recipient cash or shares of Stock payable hereunder having a Fair Market Value sufficient to satisfy any applicable federal, foreign, state or local income or employment tax withholding obligation. Page 30 of 77 19. California Law. The interpretation, performance and enforcement -------------- of this agreement shall be governed by the laws of the State of California. IN WITNESS WHEREOF, the Company and Recipient have executed this agreement as of the day and year first above written. Essex Property Trust, Inc. By: /s/ Keith R. Guericke --------------------------------------- Keith R. Guericke, Chief Executive Officer /s/ Michael J. Schall --------------------------------------- Michael J. Schall c/o Essex Property Trust, Inc. 777 California Avenue Palo Alto, CA 94304 Page 31 of 77 EX-10.3 4 REPLACEMENT PROMISSORY NOTE, 4/15/96, MR. GUERICKE EXHIBIT 10.3 REPLACEMENT PROMISSORY NOTE $75,000 April 15, 1996 Palo Alto, California FOR VALUE RECEIVED, the undersigned, KEITH R. GUERICKE, an individual (the "Maker"), promises to pay on April 15, 2006 to ESSEX PORTFOLIO, L.P., a California limited partnership ("Lender"), or order, at such place as the holder hereof may from time to time designate, the principal sum of SEVENTY-FIVE THOUSAND DOLLARS ($75,000), together with interest thereon from the date hereof (the "Effective Date") until paid at the rate of eight percent (8%) per annum, non-compounded. Interest will be computed on a three hundred sixty-five (365) day (or, where appropriate, three hundred sixty-six (366) day) basis and the actual number of days elapsed. By acceptance of this Replacement Note, Lender hereby acknowledges and agrees that this Replacement Note replaces and supersedes in its entirety the Strait Note (Balloon Payment), dated April 15, 1996, and such note shall be deemed canceled and of no further force and effect. The Maker reserves the right to prepay this Replacement Note in whole or in part at any time, without penalty provided, however, that with each such prepayment, Maker shall also pay the interest accrued on the principal amount being prepaid to the date of such prepayment. This Replacement Note is secured by a Pledge Agreement, dated April 15, 1996 (the "Pledge Agreement"), from the Maker to Lender, granting a security interest to Lender in a portion of the Maker's partnership interest in Lender. Reference is made to such document for a description of the nature and extent of the security afforded thereby, the rights of the holder hereof in respect of such security, the acceleration of the maturity of the obligations hereunder upon the happening of certain events and the terms and conditions upon which this Replacement Note is secured. The holder of this Replacement Note is entitled to the benefits of the Pledge Agreement and may enforce the agreements of the Maker contained therein and exercise the remedies provided therein or otherwise in respect thereof, all in accordance with the terms thereof. The Maker, and any endorsers or guarantors hereof, jointly and severally waive diligence, presentment, protest and demand and also notice of protest, demand, dishonor and nonpayment of this Replacement Note, and expressly agree that this Replacement Note, or any payment hereunder, may be extended from time to time by the holder hereof without notice to or consent of the Maker or any endorser or guarantor hereof, and hereby consent to the acceptance by the holder hereof of further security or the release by the holder hereof of or change in any security for this Replacement Note without any need for any further consent by or notice to, and without in any way affecting the liability of, the Maker and any endorsers or guarantors hereof. No extension of time for the payment of this Replacement Note made by agreement by the holder hereof with any person now or hereafter liable for the payment of this Replacement Note shall affect the original liability under this Replacement Note of the Maker, even if the Maker is not a party to such agreement. The pleading of any statute of limitations as a defense to any demand Page 32 of 77 against the Maker or any endorsers or guarantors hereof, is expressly waived by each and all of said parties to the full extent permitted by law. The Maker agrees to pay all collection expenses, court costs and reasonable attorneys' fees and disbursements (whether or not litigation is commenced) which may be incurred in connection with the collection or enforcement of this Replacement Note. This Replacement Note shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the Maker has caused this Replacement Note to be executed as of the Effective Date. /s/ Keith R. Guericke ---------------------------- Keith R. Guericke Page 33 of 77 PLEDGE AGREEMENT THIS PLEDGE AGREEMENT (this "Agreement") is made as of April 15, 1996, by and between KEITH R. GUERICKE, an individual ("Pledgor"), and ESSEX PORTFOLIO, L.P., a California limited partnership ("Secured Party"). RECITALS -------- A. Pledgor and Secured Party have entered into a Replacement Promissory Note dated April 15, 1996 (the "Note"), pursuant to which Secured Party has agreed to extend credit to Pledgor on the terms and subject to the conditions set forth therein. B. As additional security for the payment and performance of Pledgor's obligations to Secured Party under the Note, it is the intent of Pledgor to grant to Secured Party, and to create, a security interest in certain property of Pledgor, as hereinafter provided. AGREEMENT --------- NOW, THEREFORE, in consideration of the above Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Pledgor hereby agrees as follows: 1. Grant of Assignment and Security Interest. Pledgor hereby transfers, ----------------------------------------- assigns, pledges and confirms, and grants to Secured Party a security interest (the "Security Interest") in all of Pledgor's right, title and interest in and to the following pledged collateral, whether now owned or hereafter acquired (the "Pledged Collateral"): (a) the limited partnership interests in Essex Portfolio, L.P., a California limited partnership (formerly known as ESX Partners. L.P) (the "Partnership") owned by Pledgor as of the date hereof (the "Partnership Interests") that is equivalent to three thousand seven hundred fifty (3,750) shares of Essex Property Trust, Inc., any certificates or other instruments evidencing the Partnership Interests, all of Pledgor's right, title and interest in, to and under the Agreement of Limited Partnership dated March 15, 1994 (the "Partnership Agreement"), all of Pledgor's right to receive dividends, distributions, profits, cash, securities, instruments and other payments and property from time to time paid, payable or otherwise distributed in respect of or in exchange for all or any part of the Partnership Interests and all proceeds thereof; and (b) all partnership interests (general or limited) and securities issued by the Partnership, or any successor thereto, from time to time acquired by Pledgor in substitution of the foregoing, including, without limitation, all partnership interests or securities convertible into or exchangeable for such interests and all options, warrants and other rights to purchase such interests, all certificates and instruments evidencing such interests or securities, together with the interest coupons (if any) attached thereto, and all dividends, distributions, profits, cash, securities, instruments and other payments and property from time to time paid, payable or Page 34 of 77 otherwise distributed in respect of or in exchange for any or all of such interests or securities and all proceeds thereof. As used herein, the term "proceeds" shall be construed in its broadest sense and shall include whatever is receivable or received when any of the Pledged Collateral, or any proceeds thereof, is sold, collected, exchanged or otherwise disposed of, whether voluntarily or involuntarily, and shall include, without limitation, all rights to payment, including interest and premiums, with respect to any of the Pledged Collateral or any proceeds thereof. 2. Obligations. The obligations secured by this Agreement (collectively, ----------- the "Obligations") shall consist of: (a) The prompt payment in full when due (whether at stated maturity, by acceleration, or otherwise) of all indebtedness of Pledgor evidenced by the Note and all amendments, extensions and renewals thereof; (b) payment of all sums advanced in accordance herewith by or on behalf of the Secured Party to protect the Pledged Collateral following an Event of Default (as defined in Section 13); and (c) payment of all sums that may become due and payable to or for the benefit of the Secured Party pursuant to the terms of this Agreement and the Note; in each case, whether now existing or hereafter arising, voluntary or involuntary, absolute or contingent, liquidated or unliquidated, and whether or not from time to time decreased or extinguished and later increased, created, or incurred. 3. Voting Rights, Distributions. ---------------------------- (a) So long as no Event of Default shall have occurred and be continuing, Pledgor shall be entitled to (i) exercise any and all voting and other consensual rights pertaining to the Pledged Collateral belonging to Pledgor, or any part thereof, for any purpose not inconsistent with the terms of this Agreement or the Note, and (ii) receive and retain any dividends, distributions, profits, cash and other payments and property from time to time paid, payable or otherwise distributed in respect of the Pledged Collateral, provided, however, that any and all (A) dividends, profits, and other payments - -------- ------- and distributions paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Pledged Collateral, (B) dividends, profits and other payments and distributions paid or payable in cash in respect of any Pledged Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, and (C) cash paid, payable or otherwise distributed in redemption of or in exchange for any Pledged Collateral shall be, and shall forthwith be delivered to Secured Party to hold as, Pledged Collateral and shall if received by Pledgor, be received in trust for the benefit of Secured Party, be segregated from other property or funds of Pledgor and be forthwith delivered to Secured Party as Collateral in the same form as so received (with all necessary endorsements). Page 35 of 77 (b) Upon the occurrence and continuance of any Event of Default and written notice from Secured Party to Pledgor, all rights of Pledgor to exercise voting and other consensual rights that it would otherwise be entitled to exercise pursuant to Section 3(a)(i) shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to exercise such voting and other consensual rights. Pledgor hereby irrevocably appoints the Secured Party as Pledgor's proxyholder with respect to the Partnership Interests and any other voting interests or other securities of Pledgor forming a part of the Pledged Collateral with full power and authority to vote such Partnership Interests and other voting interests or securities and to otherwise act with respect to such Partnership Interests or other voting interests or securities on behalf of Pledgor, provided that this proxy shall only be operative upon the occurrence of an Event of Default and only for so long as such default continues. This proxy shall be irrevocable for so long as any of the Obligations remains in existence. Pledgor shall execute and deliver (or cause to be executed and delivered) to Secured Party all proxies and other instruments as Secured Party may reasonably request for the purpose of enabling Secured Party to exercise the voting and other rights with respect to the Pledged Collateral which it is entitled to exercise pursuant to this Section 3(b). (c) Upon the occurrence and continuance of any Event of Default and written notice from Secured Party to Pledgor, all rights to receive any and all payments and other distributions with respect to the Pledged Collateral which Pledgor would otherwise be authorized to receive and retain pursuant to Section 3(a) (ii) shall cease and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to receive and hold such payments as Pledged Collateral for application against any of the Obligations. All payments which are received by Pledgor contrary to the provisions of this Section 3(c) shall be received in trust for the benefit of Secured Party, shall be segregated from other funds of Pledgor and shall be forthwith paid over to Secured Party as Pledged Collateral in the same form as so received (with any necessary endorsements). 4. Perfection of Security Interest. Concurrently with the execution of ------------------------------- this Agreement, Pledgor shall execute and deliver to Secured Party Uniform Commercial Code financing statements covering the Pledged Collateral. Pledgor agrees that Secured Party may file such financing statements with any and all governmental authorities that Secured Party deems appropriate for the purpose of perfecting the Security Interest in the Pledged Collateral. In the event any such financing statement is for any reason not acceptable to a governmental authority to which it is submitted for filing, Pledgor shall execute and deliver to Secured Party promptly upon Secured Party's request another financing statement in the form required by the governmental authority. In addition, upon request by Secured Party, Pledgor, at its own expense, shall deliver to the Partnership an order, satisfactory in form and substance to Secured Party, requesting that the pledge of Pledgor's interest as a limited partner in the Partnership be registered on the books of the Partnership. 5. Further Assurances. Pledgor agrees that at any time and from time to ------------------ time, at the expense of Pledgor, it will promptly execute and deliver all further instruments and documents, and take all further actions, that Secured Party may reasonably request, in order to perfect and protect the Security Interest in the Pledged Collateral granted or purported to be granted hereby Page 36 of 77 or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. 6. Delivery of Pledged Collateral; Issuance of Additional Interests. ---------------------------------------------------------------- (a) All certificates, instruments or documents, if any, representing or evidencing the Partnership Interests shall be delivered to Secured Party on the date hereof, and shall be held by Secured Party pursuant hereto at all times hereafter, and all certificates, instruments or documents representing or evidencing interests or securities in or issued by the Partnership and acquired by Pledgor after the date hereof and constituting collateral hereunder shall be delivered to Secured Party immediately upon, and held by Secured Party at all times after the acquisition thereof by Pledgor. All such certificates, instruments or documents, if any, shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to Secured Party. (b) Pledgor agrees that it shall take all actions available to Pledgor to cause the Partnership and, in the event of a merger or consolidation of the Partnership with any other entity, such other entity, not to issue any interests or other securities whether in addition to, by dividend or other distribution upon, or in substitution or exchange for, the Partnership Interests or otherwise, except for such interests or other securities issued to Pledgor in which Secured Party has a valid and perfected first-priority security interest free and clear of all other liens and encumbrances. 7. Secured Party Appointed Attorney in Fact, No Assumption. ------------------------------------------------------- (a) Pledgor hereby irrevocably appoints Secured Party as Pledgor's attorney-in-fact for the purpose of carrying out the provisions of this Agreement and taking any action and executing such instruments which Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, to preserve the validity, perfection and priority of the Security Interests granted hereunder and, following any Event of Default, to exercise its rights, remedies, powers and privileges under this Agreement, including, without limitation, (i) to ask, demand, collect, sue for, recover, receive and give receipt and discharge for amounts due or to become due under or in respect of all or any part of the Pledged Collateral, (ii) to receive, endorse and collect all instruments made payable to Pledgor representing payment of dividends, profits or any other distribution in respect of all or any part of the Pledged Collateral, (iii) to file any claims or take any action or institute any proceedings that Secured Party may deem necessary or desirable for the collection of any of the Pledged Collateral or otherwise enforce the rights of Secured Party with respect to any of the Pledged Collateral, and (iv) to execute, in connection with any sale or disposition of the Pledged Collateral under Section 13, any endorsements, assignments, bills of sale or other instruments of conveyance or transfer with respect to all or any part of the Pledged Collateral. (b) Anything to the contrary notwithstanding, Pledgor shall remain liable under the Partnership Agreement to the extent set forth therein and shall perform all of its duties and obligations under such Partnership Agreement to the same extent as if this Agreement had Page 37 of 77 not been executed. Secured Party shall not have any obligation or liability under the Partnership Agreement by reason of this Agreement, nor shall Secured Party be obligated to perform any of the obligations or duties of Pledgor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. 8. Dispositions and Release of Pledged Collateral. Pledgor covenants ---------------------------------------------- that it shall not enter into or perform any agreement to sell, assign, lease, transfer or otherwise dispose of all or any part of the Pledged Collateral without the prior written consent of Secured Party, unless the Security Interest in such Pledged Collateral shall have been released prior to the time such agreement is entered into. 9. Ratable Release of Security Interest. The Security Interest in the ------------------------------------ Pledged Collateral shall automatically be released upon and concurrent with any repayment of the principal balance of the Note in proportion to the percentage repayment of the principal balance of the Note (e.g., if the original principal balance is $100 and a principal repayment of $25 is made, 25% of the Pledged Collateral shall be released from the Security Interest; if an additional $15 principal repayment is made, 20% of the remaining Pledged Collateral shall be released (i.e., 15% of the original Pledged Collateral) such that the Security Interest would remain in effect with respect to 60% of the original Pledged Collateral). Secured Party shall execute, acknowledge and deliver to Pledgor such instruments as may be reasonably requested by Pledgor to evidence the release of the Security Interest pursuant to this Section 9. 10. Termination of Security Interest. The Security Interest shall -------------------------------- terminate upon payment and performance in full of the Obligations. Promptly following such payment and performance in full, Secured Party shall execute, acknowledge and deliver to Pledgor such instruments of discharge and release of the Security Interest as may be reasonably requested by Pledgor. 11. Representations and Warranties. Pledgor hereby represents and ------------------------------ warrants to Secured Party, as of the date hereof and, where relevant, until the Obligations are paid in full, that: (a) Pledgor has full power and authority to enter into and perform this Agreement and the Note; (b) all authorizations, consents, approvals, registrations, exemptions, permits and licenses with or from governmental authorities which are necessary for the execution and delivery by Pledgor of this Agreement and the Note, and the performance by it of its obligations hereunder and thereunder as already obtained have been effected or obtained and are in full force and effect, are final and are not subject to any pending or threatened judicial or administrative proceeding. (c) this Agreement and the Note constitute the valid and legally binding obligation of Pledgor, enforceable in accordance with their respective terms; and Page 38 of 77 (d) Pledgor is the legal and beneficial owner of the Pledged Collateral and no other person has any right, title, claim or interest (by way of security interest or other lien or charge or otherwise) in, against or to the Pledged Collateral, except as disclosed in writing to Secured Party prior to the date hereof. 12. Covenants of Pledgor. From the date hereof until the Obligations are -------------------- paid in full, Pledgor covenants and agrees that: (a) it shall do all acts that may reasonably be necessary to maintain, preserve and protect the Pledged Collateral and Secured Party's Security Interest therein; (b) it shall not create, incur, assume or suffer to exist any further assignment, encumbrance, or lien upon the Pledged Collateral without the prior written consent of Secured Party; (c) it shall not assign any of its rights or obligations hereunder or under the Note without the prior written consent of Secured Party; and (d) it shall appear in and defend any action or proceeding that may affect its title to or Secured Party's interest in the Pledged Collateral. 13. Default and Remedies. An Event of Default shall be deemed to have -------------------- occurred hereunder upon the occurrence of any of the following: (a) Pledgor shall default in the payment of principal or interest on the Note when due and shall remain in default for fifteen (15) days after receipt of notice of such default from Secured Party; (b) Any of the representations or warranties made by Pledgor herein shall be false or misleading in any material respect at the time made; or (c) Pledgor shall fail to perform or observe any other covenant, term, provision, condition, agreement or obligation of this Agreement or the Note and such failure shall continue unremedied for a period of thirty (30) days after receipt of notice of such failure, provided, that such failure shall not -------- be deemed an Event of Default if such failure cannot reasonably be cured within such thirty (30) day period, Pledgor promptly institutes and diligently pursues actions to cure such failure and Pledgor cures such failure within such period reasonably necessary; or (d) Pledgor shall admit in writing its inability to pay its debts as they mature; or make an assignment for the benefit of creditors, or apply for or consent to the appointment of or taking possession by a trustee, liquidator, assignee, custodian, sequestrator or receiver (or similar official) for it or for a substantial part of its property; or (e) A trustee, liquidator, assignee, custodian, sequestrator or receiver (or similar official) shall be appointed for Pledgor or for a substantial part of its property without its Page 39 of 77 consent and shall not be discharged within one hundred twenty (120) days after such appointment; or (f) A bankruptcy, reorganization, insolvency, or liquidation case or other case for relief under any bankruptcy law or any law for the relief of debtors shall be commenced by or against Pledgor and, if instituted against Pledgor, shall not be dismissed within one hundred twenty (120) days after such institution. Upon the occurrence of any such Event of Default, the outstanding principal balance on the Note, together with all accrued interest thereon shall, at the option of Secured Party (or, in the case of an Event of Default under clauses (d), (e) and (f), automatically) become immediately due and payable. Upon the occurrence of such Event of Default and acceleration by Secured Party of the Obligations secured hereby, Secured Party may, at its option, and without notice to or demand upon Pledgor and in addition to all rights and remedies available to Secured Party provided for herein or under the Note or otherwise available to it, exercise in respect of the Pledged Collateral, all rights and remedies of a secured party after default under the Uniform Commercial Code as in effect in any relevant jurisdiction at that time, including, without limitation, the right to reduce Secured Party's claim to a judgment, to foreclose upon the Pledged Collateral or any portion thereof at public or private sale, and otherwise to enforce Secured Party's Security Interest in any manner permitted by law. 14. Application of Proceeds. The proceeds of any sale of the Pledged ----------------------- Collateral shall be applied as follows: (a) To the payment of the reasonable costs and expenses (including legal fees and expenses) incurred by Secured Party in connection with the exercise of its rights or remedies, including costs and expenses incurred in retaking, holding and preparing for the sale and the selling of the Pledged Collateral and the discharge of all assessments, encumbrances, charges or liens, if any, on the Pledged Collateral prior to the lien hereof (except any taxes, assessments, encumbrances, charges or liens subject to which such sale shall have been made); (b) To the payment of all or any part of the Obligations (including principal and interest under the Note); and (c) The surplus, if any, shall be paid to such persons as are lawfully entitled to receive the same or shall be paid to whomsoever a court of competent jurisdiction may direct. 15. Cumulative Rights. The rights, powers and remedies of Secured Party ----------------- under this Agreement shall be in addition to all rights, powers and remedies given to Secured Party by virtue of any statute or rule of law, the Note or any other agreement, all of which rights, powers and remedies shall be cumulative and may be exercised successively or concurrently without impairing Secured Party's security interest in the Pledged Collateral. 16. Waiver. Any forbearance or failure to delay by Secured Party in ------ exercising any right, power or remedy hereunder or under the Note shall not preclude the further exercise thereof, and every right, power or remedy of Secured Party hereunder or under the Note shall Page 40 of 77 continue in full force and effect until such right, power or remedy is specifically waived in a writing executed by Secured Party. Pledgor waives any right to require Secured Party to proceed against any person or to exhaust any Pledged Collateral or to pursue any remedy in Secured Party's power. 17. Binding Upon Successors. All rights of Secured Party under this ----------------------- Agreement shall inure to the benefit of its successors and assigns, and all obligations of Pledgor shall bind its heirs, executors, administrators, permitted successors and assigns. 18. Entire Agreement; Severability. This Agreement contains the entire ------------------------------ security agreement between Secured Party and Pledgor. If any of the provisions of this Agreement shall be held invalid or unenforceable, this Agreement shall be construed as if not containing those provisions and the rights and obligations of the parties hereto shall be construed and enforced accordingly. 19. References. The singular includes the plural. If more than one ---------- executes this Agreement, the term Pledgor shall be deemed to refer to each of the undersigned as well as to all of them, and their obligations and agreements hereunder shall be joint and several. 20. Choice of Law. This Agreement shall be construed in accordance with ------------- and governed by the laws of the State of California, and, where applicable and except as otherwise defined herein, terms used herein shall have the meanings given them in the California Uniform Commercial Code. 21. Notice. Any notice, consent or other communication provided for in ------ this Agreement shall be in writing and shall be delivered, telecopied or sent by courier service or registered U.S. mail, with postage prepaid, to the following addresses: Secured Party: Essex Portfolio, L.P. 777 California Avenue Palo Alto, CA 94304 Pledgor: Keith R. Guericke c/o Essex Property Trust, Inc. 777 California Avenue Palo Alto, CA 94304 Any such notice, consent or other communication shall be deemed to have been duly given when delivered in person or by courier service, upon receipt of telecopy or 4 business days after Page 41 of 77 deposit in registered U.S. mail, with postage prepaid and properly addressed. Such addresses may be changed by written notice given as provided herein. IN WITNESS WHEREOF, the parties hereto have executed this Pledge Agreement as of the date first written above. PLEDGOR: /s/ Keith R. Guericke ---------------------------------- Keith R. Guericke SECURED PARTY: Essex Portfolio, L.P., a California limited partnership By: ESSEX PROPERTY TRUST, INC., a Maryland corporation Its: General Partner By: /s/ Michael J. Schall ----------------------------- Michael J. Schall Its: Chief Financial Officer Page 42 of 77 EX-10.4 5 PROMISSORY NOTE, 12/31/96, AND PLEDGE AGMT MR. GUERICKE EXHIBIT 10.4 PROMISSORY NOTE $75,000 December 31, 1996 Palo Alto, California FOR VALUE RECEIVED, the undersigned, KEITH R. GUERICKE, an individual (the "Maker"), promises to pay on December 31, 2006 to ESSEX PORTFOLIO, L.P., a California limited partnership ("Lender"), or order, at such place as the holder hereof may from time to time designate, the principal sum of SEVENTY-FIVE THOUSAND DOLLARS ($75,000), together with interest thereon from the date hereof (the "Effective Date") until paid at the rate of eight percent (8%) per annum, non-compounded. Interest will be computed on a three hundred sixty-five (365) day (or, where appropriate, three hundred sixty-six (366) day) basis and the actual number of days elapsed. The Maker reserves the right to prepay this Note in whole or in part at any time, without penalty provided, however, that with each such prepayment, Maker shall also pay the interest accrued on the principal amount being prepaid to the date of such prepayment. This Note is secured by a Pledge Agreement, dated December 31, 1996 (the "Pledge Agreement"), from the Maker to Lender, granting a security interest to Lender in a portion of the Maker's partnership interest in Lender. Reference is made to such document for a description of the nature and extent of the security afforded thereby, the rights of the holder hereof in respect of such security, the acceleration of the maturity of the obligations hereunder upon the happening of certain events and the terms and conditions upon which this Note is secured. The holder of this Note is entitled to the benefits of the Pledge Agreement and may enforce the agreements of the Maker contained therein and exercise the remedies provided therein or otherwise in respect thereof, all in accordance with the terms thereof. The Maker, and any endorsers or guarantors hereof, jointly and severally waive diligence, presentment, protest and demand and also notice of protest, demand, dishonor and nonpayment of this Note, and expressly agree that this Note, or any payment hereunder, may be extended from time to time by the holder hereof without notice to or consent of the Maker or any endorser or guarantor hereof, and hereby consent to the acceptance by the holder hereof of further security or the release by the holder hereof of or change in any security for this Note without any need for any further consent by or notice to, and without in any way affecting the liability of, the Maker and any endorsers or guarantors hereof. No extension of time for the payment of this Note made by agreement by the holder hereof with any person now or hereafter liable for the payment of this Note shall affect the original liability under this Note of the Maker, even if the Maker is not a party to such agreement. The pleading of any statute of limitations as a defense to any demand against the Maker or any endorsers or guarantors hereof, is expressly waived by each and all of said parties to the full extent permitted by law. Page 43 of 77 The Maker agrees to pay all collection expenses, court costs and reasonable attorneys' fees and disbursements (whether or not litigation is commenced) which may be incurred in connection with the collection or enforcement of this Note. This Note shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the Maker has caused this Note to be executed as of the Effective Date. /s/ Keith R. Guericke ------------------------- Keith R. Guericke Page 44 of 77 PLEDGE AGREEMENT THIS PLEDGE AGREEMENT (this "Agreement") is made as of December 31, 1996, by and between KEITH R. GUERICKE, an individual ("Pledgor"), and ESSEX PORTFOLIO, L.P., a California limited partnership ("Secured Party"). RECITALS -------- A. Pledgor and Secured Party have entered into a Promissory Note dated December 31, 1996 (the "Note"), pursuant to which Secured Party has agreed to extend credit to Pledgor on the terms and subject to the conditions set forth therein. B. As additional security for the payment and performance of Pledgor's obligations to Secured Party under the Note, it is the intent of Pledgor to grant to Secured Party, and to create, a security interest in certain property of Pledgor, as hereinafter provided. AGREEMENT --------- NOW, THEREFORE, in consideration of the above Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Pledgor hereby agrees as follows: 1. Grant of Assignment and Security Interest. Pledgor hereby transfers, ----------------------------------------- assigns, pledges and confirms, and grants to Secured Party a security interest (the "Security Interest") in all of Pledgor's right, title and interest in and to the following pledged collateral, whether now owned or hereafter acquired (the "Pledged Collateral"): (a) the limited partnership interests in Essex Portfolio, L.P., a California limited partnership (formerly known as ESX Partners. L.P) (the "Partnership") owned by Pledgor as of the date hereof (the "Partnership Interests") that is equivalent to two thousand five hundred fifty-three (2,553) shares of Essex Property Trust, Inc., any certificates or other instruments evidencing the Partnership Interests, all of Pledgor's right, title and interest in, to and under the Agreement of Limited Partnership dated March 15, 1994 (the "Partnership Agreement"), all of Pledgor's right to receive dividends, distributions, profits, cash, securities, instruments and other payments and property from time to time paid, payable or otherwise distributed in respect of or in exchange for all or any part of the Partnership Interests and all proceeds thereof; and (b) all partnership interests (general or limited) and securities issued by the Partnership, or any successor thereto, from time to time acquired by Pledgor in substitution of the foregoing, including, without limitation, all partnership interests or securities convertible into or exchangeable for such interests and all options, warrants and other rights to purchase such interests, all certificates and instruments evidencing such interests or securities, together with the interest coupons (if any) attached thereto, and all dividends, distributions, profits, cash, securities, instruments and other payments and property from time to time paid, payable Page 45 of 77 or otherwise distributed in respect of or in exchange for any or all of such interests or securities and all proceeds thereof. As used herein, the term "proceeds" shall be construed in its broadest sense and shall include whatever is receivable or received when any of the Pledged Collateral, or any proceeds thereof, is sold, collected, exchanged or otherwise disposed of, whether voluntarily or involuntarily, and shall include, without limitation, all rights to payment, including interest and premiums, with respect to any of the Pledged Collateral or any proceeds thereof. 2. Obligations. The obligations secured by this Agreement (collectively, ----------- the "Obligations") shall consist of: (a) The prompt payment in full when due (whether at stated maturity, by acceleration, or otherwise) of all indebtedness of Pledgor evidenced by the Note and all amendments, extensions and renewals thereof; (b) payment of all sums advanced in accordance herewith by or on behalf of the Secured Party to protect the Pledged Collateral following an Event of Default (as defined in Section 13); and (c) payment of all sums that may become due and payable to or for the benefit of the Secured Party pursuant to the terms of this Agreement and the Note; in each case, whether now existing or hereafter arising, voluntary or involuntary, absolute or contingent, liquidated or unliquidated, and whether or not from time to time decreased or extinguished and later increased, created, or incurred. 3. Voting Rights, Distributions. ---------------------------- (a) So long as no Event of Default shall have occurred and be continuing, Pledgor shall be entitled to (i) exercise any and all voting and other consensual rights pertaining to the Pledged Collateral belonging to Pledgor, or any part thereof, for any purpose not inconsistent with the terms of this Agreement or the Note, and (ii) receive and retain any dividends, distributions, profits, cash and other payments and property from time to time paid, payable or otherwise distributed in respect of the Pledged Collateral, provided, however, that any and all (A) dividends, profits, and other payments - ----------------- and distributions paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Pledged Collateral, (B) dividends, profits and other payments and distributions paid or payable in cash in respect of any Pledged Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, and (C) cash paid, payable or otherwise distributed in redemption of or in exchange for any Pledged Collateral shall be, and shall forthwith be delivered to Secured Party to hold as, Pledged Collateral and shall if received by Pledgor, be received in trust for the benefit of Secured Party, be segregated from other property or funds of Pledgor and be forthwith delivered to Secured Party as Collateral in the same form as so received (with all necessary endorsements). Page 46 of 77 (b) Upon the occurrence and continuance of any Event of Default and written notice from Secured Party to Pledgor, all rights of Pledgor to exercise voting and other consensual rights that it would otherwise be entitled to exercise pursuant to Section 3(a)(i) shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to exercise such voting and other consensual rights. Pledgor hereby irrevocably appoints the Secured Party as Pledgor's proxyholder with respect to the Partnership Interests and any other voting interests or other securities of Pledgor forming a part of the Pledged Collateral with full power and authority to vote such Partnership Interests and other voting interests or securities and to otherwise act with respect to such Partnership Interests or other voting interests or securities on behalf of Pledgor, provided that this proxy shall only be operative upon the occurrence of an Event of Default and only for so long as such default continues. This proxy shall be irrevocable for so long as any of the Obligations remains in existence. Pledgor shall execute and deliver (or cause to be executed and delivered) to Secured Party all proxies and other instruments as Secured Party may reasonably request for the purpose of enabling Secured Party to exercise the voting and other rights with respect to the Pledged Collateral which it is entitled to exercise pursuant to this Section 3(b). (c) Upon the occurrence and continuance of any Event of Default and written notice from Secured Party to Pledgor, all rights to receive any and all payments and other distributions with respect to the Pledged Collateral which Pledgor would otherwise be authorized to receive and retain pursuant to Section 3(a) (ii) shall cease and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to receive and hold such payments as Pledged Collateral for application against any of the Obligations. All payments which are received by Pledgor contrary to the provisions of this Section 3(c) shall be received in trust for the benefit of Secured Party, shall be segregated from other funds of Pledgor and shall be forthwith paid over to Secured Party as Pledged Collateral in the same form as so received (with any necessary endorsements). 4. Perfection of Security Interest. Concurrently with the execution of ------------------------------- this Agreement, Pledgor shall execute and deliver to Secured Party Uniform Commercial Code financing statements covering the Pledged Collateral. Pledgor agrees that Secured Party may file such financing statements with any and all governmental authorities that Secured Party deems appropriate for the purpose of perfecting the Security Interest in the Pledged Collateral. In the event any such financing statement is for any reason not acceptable to a governmental authority to which it is submitted for filing, Pledgor shall execute and deliver to Secured Party promptly upon Secured Party's request another financing statement in the form required by the governmental authority. In addition, upon request by Secured Party, Pledgor, at its own expense, shall deliver to the Partnership an order, satisfactory in form and substance to Secured Party, requesting that the pledge of Pledgor's interest as a limited partner in the Partnership be registered on the books of the Partnership. 5. Further Assurances. Pledgor agrees that at any time and from time to ------------------ time, at the expense of Pledgor, it will promptly execute and deliver all further instruments and documents, and take all further actions, that Secured Party may reasonably request, in order to perfect and protect the Security Interest in the Pledged Collateral granted or purported to be granted hereby Page 47 of 77 or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. 6. Delivery of Pledged Collateral; Issuance of Additional Interests. ---------------------------------------------------------------- (a) All certificates, instruments or documents, if any, representing or evidencing the Partnership Interests shall be delivered to Secured Party on the date hereof, and shall be held by Secured Party pursuant hereto at all times hereafter, and all certificates, instruments or documents representing or evidencing interests or securities in or issued by the Partnership and acquired by Pledgor after the date hereof and constituting collateral hereunder shall be delivered to Secured Party immediately upon, and held by Secured Party at all times after the acquisition thereof by Pledgor. All such certificates, instruments or documents, if any, shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to Secured Party. (b) Pledgor agrees that it shall take all actions available to Pledgor to cause the Partnership and, in the event of a merger or consolidation of the Partnership with any other entity, such other entity, not to issue any interests or other securities whether in addition to, by dividend or other distribution upon, or in substitution or exchange for, the Partnership Interests or otherwise, except for such interests or other securities issued to Pledgor in which Secured Party has a valid and perfected first-priority security interest free and clear of all other liens and encumbrances. 7. Secured Party Appointed Attorney in Fact, No Assumption. ------------------------------------------------------- (a) Pledgor hereby irrevocably appoints Secured Party as Pledgor's attorney-in-fact for the purpose of carrying out the provisions of this Agreement and taking any action and executing such instruments which Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, to preserve the validity, perfection and priority of the Security Interests granted hereunder and, following any Event of Default, to exercise its rights, remedies, powers and privileges under this Agreement, including, without limitation, (i) to ask, demand, collect, sue for, recover, receive and give receipt and discharge for amounts due or to become due under or in respect of all or any part of the Pledged Collateral, (ii) to receive, endorse and collect all instruments made payable to Pledgor representing payment of dividends, profits or any other distribution in respect of all or any part of the Pledged Collateral, (iii) to file any claims or take any action or institute any proceedings that Secured Party may deem necessary or desirable for the collection of any of the Pledged Collateral or otherwise enforce the rights of Secured Party with respect to any of the Pledged Collateral, and (iv) to execute, in connection with any sale or disposition of the Pledged Collateral under Section 13, any endorsements, assignments, bills of sale or other instruments of conveyance or transfer with respect to all or any part of the Pledged Collateral. (b) Anything to the contrary notwithstanding, Pledgor shall remain liable under the Partnership Agreement to the extent set forth therein and shall perform all of its duties and obligations under such Partnership Agreement to the same extent as if this Agreement had Page 48 of 77 not been executed. Secured Party shall not have any obligation or liability under the Partnership Agreement by reason of this Agreement, nor shall Secured Party be obligated to perform any of the obligations or duties of Pledgor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. 8. Dispositions and Release of Pledged Collateral. Pledgor covenants ---------------------------------------------- that it shall not enter into or perform any agreement to sell, assign, lease, transfer or otherwise dispose of all or any part of the Pledged Collateral without the prior written consent of Secured Party, unless the Security Interest in such Pledged Collateral shall have been released prior to the time such agreement is entered into. 9. Ratable Release of Security Interest. The Security Interest in the ------------------------------------ Pledged Collateral shall automatically be released upon and concurrent with any repayment of the principal balance of the Note in proportion to the percentage repayment of the principal balance of the Note (e.g., if the original principal balance is $100 and a principal repayment of $25 is made, 25% of the Pledged Collateral shall be released from the Security Interest; if an additional $15 principal repayment is made, 20% of the remaining Pledged Collateral shall be released (i.e., 15% of the original Pledged Collateral) such that the Security Interest would remain in effect with respect to 60% of the original Pledged Collateral). Secured Party shall execute, acknowledge and deliver to Pledgor such instruments as may be reasonably requested by Pledgor to evidence the release of the Security Interest pursuant to this Section 9. 10. Termination of Security Interest. The Security Interest shall -------------------------------- terminate upon payment and performance in full of the Obligations. Promptly following such payment and performance in full, Secured Party shall execute, acknowledge and deliver to Pledgor such instruments of discharge and release of the Security Interest as may be reasonably requested by Pledgor. 11. Representations and Warranties. Pledgor hereby represents and ------------------------------ warrants to Secured Party, as of the date hereof and, where relevant, until the Obligations are paid in full, that: (a) Pledgor has full power and authority to enter into and perform this Agreement and the Note; (b) all authorizations, consents, approvals, registrations, exemptions, permits and licenses with or from governmental authorities which are necessary for the execution and delivery by Pledgor of this Agreement and the Note, and the performance by it of its obligations hereunder and thereunder as already obtained have been effected or obtained and are in full force and effect, are final and are not subject to any pending or threatened judicial or administrative proceeding. (c) this Agreement and the Note constitute the valid and legally binding obligation of Pledgor, enforceable in accordance with their respective terms; and Page 49 of 77 (d) Pledgor is the legal and beneficial owner of the Pledged Collateral and no other person has any right, title, claim or interest (by way of security interest or other lien or charge or otherwise) in, against or to the Pledged Collateral, except as disclosed in writing to Secured Party prior to the date hereof. 12. Covenants of Pledgor. From the date hereof until the Obligations are -------------------- paid in full, Pledgor covenants and agrees that: (a) it shall do all acts that may reasonably be necessary to maintain, preserve and protect the Pledged Collateral and Secured Party's Security Interest therein; (b) it shall not create, incur, assume or suffer to exist any further assignment, encumbrance, or lien upon the Pledged Collateral without the prior written consent of Secured Party; (c) it shall not assign any of its rights or obligations hereunder or under the Note without the prior written consent of Secured Party; and (d) it shall appear in and defend any action or proceeding that may affect its title to or Secured Party's interest in the Pledged Collateral. 13. Default and Remedies. An Event of Default shall be deemed to have -------------------- occurred hereunder upon the occurrence of any of the following: (a) Pledgor shall default in the payment of principal or interest on the Note when due and shall remain in default for fifteen (15) days after receipt of notice of such default from Secured Party; (b) Any of the representations or warranties made by Pledgor herein shall be false or misleading in any material respect at the time made; or (c) Pledgor shall fail to perform or observe any other covenant, term, provision, condition, agreement or obligation of this Agreement or the Note and such failure shall continue unremedied for a period of thirty (30) days after receipt of notice of such failure, provided, that such failure shall not be deemed an Event of Default if such failure cannot reasonably be cured within such thirty (30) day period, Pledgor promptly institutes and diligently pursues actions to cure such failure and Pledgor cures such failure within such period reasonably necessary; or (d) Pledgor shall admit in writing its inability to pay its debts as they mature; or make an assignment for the benefit of creditors, or apply for or consent to the appointment of or taking possession by a trustee, liquidator, assignee, custodian, sequestrator or receiver (or similar official) for it or for a substantial part of its property; or (e) A trustee, liquidator, assignee, custodian, sequestrator or receiver (or similar official) shall be appointed for Pledgor or for a substantial part of its property without its Page 50 of 77 consent and shall not be discharged within one hundred twenty (120) days after such appointment; or (f) A bankruptcy, reorganization, insolvency, or liquidation case or other case for relief under any bankruptcy law or any law for the relief of debtors shall be commenced by or against Pledgor and, if instituted against Pledgor, shall not be dismissed within one hundred twenty (120) days after such institution. Upon the occurrence of any such Event of Default, the outstanding principal balance on the Note, together with all accrued interest thereon shall, at the option of Secured Party (or, in the case of an Event of Default under clauses (d), (e) and (f), automatically) become immediately due and payable. Upon the occurrence of such Event of Default and acceleration by Secured Party of the Obligations secured hereby, Secured Party may, at its option, and without notice to or demand upon Pledgor and in addition to all rights and remedies available to Secured Party provided for herein or under the Note or otherwise available to it, exercise in respect of the Pledged Collateral, all rights and remedies of a secured party after default under the Uniform Commercial Code as in effect in any relevant jurisdiction at that time, including, without limitation, the right to reduce Secured Party's claim to a judgment, to foreclose upon the Pledged Collateral or any portion thereof at public or private sale, and otherwise to enforce Secured Party's Security Interest in any manner permitted by law. 14. Application of Proceeds. The proceeds of any sale of the Pledged ----------------------- Collateral shall be applied as follows: (a) To the payment of the reasonable costs and expenses (including legal fees and expenses) incurred by Secured Party in connection with the exercise of its rights or remedies, including costs and expenses incurred in retaking, holding and preparing for the sale and the selling of the Pledged Collateral and the discharge of all assessments, encumbrances, charges or liens, if any, on the Pledged Collateral prior to the lien hereof (except any taxes, assessments, encumbrances, charges or liens subject to which such sale shall have been made); (b) To the payment of all or any part of the Obligations (including principal and interest under the Note); and (c) The surplus, if any, shall be paid to such persons as are lawfully entitled to receive the same or shall be paid to whomsoever a court of competent jurisdiction may direct. 15. Cumulative Rights. The rights, powers and remedies of Secured Party ----------------- under this Agreement shall be in addition to all rights, powers and remedies given to Secured Party by virtue of any statute or rule of law, the Note or any other agreement, all of which rights, powers and remedies shall be cumulative and may be exercised successively or concurrently without impairing Secured Party's security interest in the Pledged Collateral. 16. Waiver. Any forbearance or failure to delay by Secured Party in ------ exercising any right, power or remedy hereunder or under the Note shall not preclude the further exercise thereof, and every right, power or remedy of Secured Party hereunder or under the Note shall Page 51 of 77 continue in full force and effect until such right, power or remedy is specifically waived in a writing executed by Secured Party. Pledgor waives any right to require Secured Party to proceed against any person or to exhaust any Pledged Collateral or to pursue any remedy in Secured Party's power. 17. Binding Upon Successors. All rights of Secured Party under this ----------------------- Agreement shall inure to the benefit of its successors and assigns, and all obligations of Pledgor shall bind its heirs, executors, administrators, permitted successors and assigns. 18. Entire Agreement; Severability. This Agreement contains the entire ------------------------------ security agreement between Secured Party and Pledgor. If any of the provisions of this Agreement shall be held invalid or unenforceable, this Agreement shall be construed as if not containing those provisions and the rights and obligations of the parties hereto shall be construed and enforced accordingly. 19. References. The singular includes the plural. If more than one ---------- executes this Agreement, the term Pledgor shall be deemed to refer to each of the undersigned as well as to all of them, and their obligations and agreements hereunder shall be joint and several. 20. Choice of Law. This Agreement shall be construed in accordance with ------------- and governed by the laws of the State of California, and, where applicable and except as otherwise defined herein, terms used herein shall have the meanings given them in the California Uniform Commercial Code. 21. Notice. Any notice, consent or other communication provided for in ------ this Agreement shall be in writing and shall be delivered, telecopied or sent by courier service or registered U.S. mail, with postage prepaid, to the following addresses: Secured Party: Essex Portfolio, L.P. 777 California Avenue Palo Alto, CA 94304 Pledgor: Keith R. Guericke c/o Essex Property Trust, Inc. 777 California Avenue Palo Alto, CA 94304 Any such notice, consent or other communication shall be deemed to have been duly given when delivered in person or by courier service, upon receipt of telecopy or 4 business days after Page 52 of 77 deposit in registered U.S. mail, with postage prepaid and properly addressed. Such addresses may be changed by written notice given as provided herein. IN WITNESS WHEREOF, the parties hereto have executed this Pledge Agreement as of the date first written above. PLEDGOR: /s/ Keith R. Guericke ---------------------------------- Keith R. Guericke SECURED PARTY: Essex Portfolio, L.P., a California limited partnership By: ESSEX PROPERTY TRUST, INC., a Maryland corporation Its: General Partner By: /s/ Michael J. Schall ------------------------------ Michael J. Schall Its: Chief Financial Officer Page 53 of 77 EX-10.5 6 REPLACEMENT PROMISSORY NOTE, 4/30/96, AND PLEDGE AGMT MR. SCHALL EXHIBIT 10.5 REPLACEMENT PROMISSORY NOTE $50,000 April 30, 1996 Palo Alto, California FOR VALUE RECEIVED, the undersigned, MICHAEL J. SCHALL, an individual (the "Maker"), promises to pay on April 30, 2006 to ESSEX PORTFOLIO, L.P., a California limited partnership ("Lender"), or order, at such place as the holder hereof may from time to time designate, the principal sum of FIFTY THOUSAND DOLLARS ($50,000), together with interest thereon from the date hereof (the "Effective Date") until paid at the rate of eight percent (8%) per annum, non- compounded. Interest will be computed on a three hundred sixty-five (365) day (or, where appropriate, three hundred sixty-six (366) day) basis and the actual number of days elapsed. By acceptance of this Replacement Note, Lender hereby acknowledges and agrees that this Replacement Note replaces and supersedes in its entirety the Strait Note (Balloon Payment), dated April 30, 1996, and such note shall be deemed canceled and of no further force and effect. The Maker reserves the right to prepay this Replacement Note in whole or in part at any time, without penalty provided, however, that with each such prepayment, Maker shall also pay the interest accrued on the principal amount being prepaid to the date of such prepayment. This Replacement Note is secured by a Pledge Agreement, dated April 30, 1996 (the "Pledge Agreement"), from the Maker to Lender, granting a security interest to Lender in a portion of the Maker's partnership interest in Lender. Reference is made to such document for a description of the nature and extent of the security afforded thereby, the rights of the holder hereof in respect of such security, the acceleration of the maturity of the obligations hereunder upon the happening of certain events and the terms and conditions upon which this Replacement Note is secured. The holder of this Replacement Note is entitled to the benefits of the Pledge Agreement and may enforce the agreements of the Maker contained therein and exercise the remedies provided therein or otherwise in respect thereof, all in accordance with the terms thereof. The Maker, and any endorsers or guarantors hereof, jointly and severally waive diligence, presentment, protest and demand and also notice of protest, demand, dishonor and nonpayment of this Replacement Note, and expressly agree that this Replacement Note, or any payment hereunder, may be extended from time to time by the holder hereof without notice to or consent of the Maker or any endorser or guarantor hereof, and hereby consent to the acceptance by the holder hereof of further security or the release by the holder hereof of or change in any security for this Replacement Note without any need for any further consent by or notice to, and without in any way affecting the liability of, the Maker and any endorsers or guarantors hereof. No extension of time for the payment of this Replacement Note made by agreement by the holder hereof with any person now or hereafter liable for the payment of this Replacement Note shall affect the original liability under this Replacement Note of the Maker, even if the Maker is not a party to such agreement. The pleading of any statute of limitations as a defense to any demand Page 54 of 77 against the Maker or any endorsers or guarantors hereof, is expressly waived by each and all of said parties to the full extent permitted by law. The Maker agrees to pay all collection expenses, court costs and reasonable attorneys' fees and disbursements (whether or not litigation is commenced) which may be incurred in connection with the collection or enforcement of this Replacement Note. This Replacement Note shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the Maker has caused this Replacement Note to be executed as of the Effective Date. /s/ Michael J. Schall ----------------------------- Michael J. Schall Page 55 of 77 PLEDGE AGREEMENT THIS PLEDGE AGREEMENT (this "Agreement") is made as of April 30, 1996, by and between MICHAEL J. SCHALL, an individual ("Pledgor"), and ESSEX PORTFOLIO, L.P., a California limited partnership ("Secured Party"). RECITALS -------- A. Pledgor and Secured Party have entered into a Replacement Promissory Note dated April 30, 1996 (the "Note"), pursuant to which Secured Party has agreed to extend credit to Pledgor on the terms and subject to the conditions set forth therein. B. As additional security for the payment and performance of Pledgor's obligations to Secured Party under the Note, it is the intent of Pledgor to grant to Secured Party, and to create, a security interest in certain property of Pledgor, as hereinafter provided. AGREEMENT --------- NOW, THEREFORE, in consideration of the above Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Pledgor hereby agrees as follows: 1. Grant of Assignment and Security Interest. Pledgor hereby transfers, ----------------------------------------- assigns, pledges and confirms, and grants to Secured Party a security interest (the "Security Interest") in all of Pledgor's right, title and interest in and to the following pledged collateral, whether now owned or hereafter acquired (the "Pledged Collateral"): (a) the limited partnership interests in Essex Portfolio, L.P., a California limited partnership (formerly known as ESX Partners. L.P) (the "Partnership") owned by Pledgor as of the date hereof (the "Partnership Interests") that is equivalent to two thousand five hundred (2,500) shares of Essex Property Trust, Inc., any certificates or other instruments evidencing the Partnership Interests, all of Pledgor's right, title and interest in, to and under the Agreement of Limited Partnership dated March 15, 1994 (the "Partnership Agreement"), all of Pledgor's right to receive dividends, distributions, profits, cash, securities, instruments and other payments and property from time to time paid, payable or otherwise distributed in respect of or in exchange for all or any part of the Partnership Interests and all proceeds thereof; and (b) all partnership interests (general or limited) and securities issued by the Partnership, or any successor thereto, from time to time acquired by Pledgor in substitution of the foregoing, including, without limitation, all partnership interests or securities convertible into or exchangeable for such interests and all options, warrants and other rights to purchase such interests, all certificates and instruments evidencing such interests or securities, together with the interest coupons (if any) attached thereto, and all dividends, distributions, profits, cash, securities, instruments and other payments and property from time to time paid, payable or Page 56 of 77 otherwise distributed in respect of or in exchange for any or all of such interests or securities and all proceeds thereof. As used herein, the term "proceeds" shall be construed in its broadest sense and shall include whatever is receivable or received when any of the Pledged Collateral, or any proceeds thereof, is sold, collected, exchanged or otherwise disposed of, whether voluntarily or involuntarily, and shall include, without limitation, all rights to payment, including interest and premiums, with respect to any of the Pledged Collateral or any proceeds thereof. 2. Obligations. The obligations secured by this Agreement (collectively, ----------- the "Obligations") shall consist of: (a) The prompt payment in full when due (whether at stated maturity, by acceleration, or otherwise) of all indebtedness of Pledgor evidenced by the Note and all amendments, extensions and renewals thereof; (b) payment of all sums advanced in accordance herewith by or on behalf of the Secured Party to protect the Pledged Collateral following an Event of Default (as defined in Section 13); and (c) payment of all sums that may become due and payable to or for the benefit of the Secured Party pursuant to the terms of this Agreement and the Note; in each case, whether now existing or hereafter arising, voluntary or involuntary, absolute or contingent, liquidated or unliquidated, and whether or not from time to time decreased or extinguished and later increased, created, or incurred. 3. Voting Rights, Distributions. ---------------------------- (a) So long as no Event of Default shall have occurred and be continuing, Pledgor shall be entitled to (i) exercise any and all voting and other consensual rights pertaining to the Pledged Collateral belonging to Pledgor, or any part thereof, for any purpose not inconsistent with the terms of this Agreement or the Note, and (ii) receive and retain any dividends, distributions, profits, cash and other payments and property from time to time paid, payable or otherwise distributed in respect of the Pledged Collateral, provided, however, that any and all (A) dividends, profits, and other payments - ----------------- and distributions paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Pledged Collateral, (B) dividends, profits and other payments and distributions paid or payable in cash in respect of any Pledged Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, and (C) cash paid, payable or otherwise distributed in redemption of or in exchange for any Pledged Collateral shall be, and shall forthwith be delivered to Secured Party to hold as, Pledged Collateral and shall if received by Pledgor, be received in trust for the benefit of Secured Party, be segregated from other property or funds of Pledgor and be forthwith delivered to Secured Party as Collateral in the same form as so received (with all necessary endorsements). Page 57 of 77 (b) Upon the occurrence and continuance of any Event of Default and written notice from Secured Party to Pledgor, all rights of Pledgor to exercise voting and other consensual rights that it would otherwise be entitled to exercise pursuant to Section 3(a)(i) shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to exercise such voting and other consensual rights. Pledgor hereby irrevocably appoints the Secured Party as Pledgor's proxyholder with respect to the Partnership Interests and any other voting interests or other securities of Pledgor forming a part of the Pledged Collateral with full power and authority to vote such Partnership Interests and other voting interests or securities and to otherwise act with respect to such Partnership Interests or other voting interests or securities on behalf of Pledgor, provided that this proxy shall only be operative upon the occurrence of an Event of Default and only for so long as such default continues. This proxy shall be irrevocable for so long as any of the Obligations remains in existence. Pledgor shall execute and deliver (or cause to be executed and delivered) to Secured Party all proxies and other instruments as Secured Party may reasonably request for the purpose of enabling Secured Party to exercise the voting and other rights with respect to the Pledged Collateral which it is entitled to exercise pursuant to this Section 3(b). (c) Upon the occurrence and continuance of any Event of Default and written notice from Secured Party to Pledgor, all rights to receive any and all payments and other distributions with respect to the Pledged Collateral which Pledgor would otherwise be authorized to receive and retain pursuant to Section 3(a) (ii) shall cease and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to receive and hold such payments as Pledged Collateral for application against any of the Obligations. All payments which are received by Pledgor contrary to the provisions of this Section 3(c) shall be received in trust for the benefit of Secured Party, shall be segregated from other funds of Pledgor and shall be forthwith paid over to Secured Party as Pledged Collateral in the same form as so received (with any necessary endorsements). 4. Perfection of Security Interest. Concurrently with the execution of ------------------------------- this Agreement, Pledgor shall execute and deliver to Secured Party Uniform Commercial Code financing statements covering the Pledged Collateral. Pledgor agrees that Secured Party may file such financing statements with any and all governmental authorities that Secured Party deems appropriate for the purpose of perfecting the Security Interest in the Pledged Collateral. In the event any such financing statement is for any reason not acceptable to a governmental authority to which it is submitted for filing, Pledgor shall execute and deliver to Secured Party promptly upon Secured Party's request another financing statement in the form required by the governmental authority. In addition, upon request by Secured Party, Pledgor, at its own expense, shall deliver to the Partnership an order, satisfactory in form and substance to Secured Party, requesting that the pledge of Pledgor's interest as a limited partner in the Partnership be registered on the books of the Partnership. 5. Further Assurances. Pledgor agrees that at any time and from time to ------------------ time, at the expense of Pledgor, it will promptly execute and deliver all further instruments and documents, and take all further actions, that Secured Party may reasonably request, in order to perfect and protect the Security Interest in the Pledged Collateral granted or purported to be granted hereby Page 58 of 77 or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. 6. Delivery of Pledged Collateral; Issuance of Additional Interests. ---------------------------------------------------------------- (a) All certificates, instruments or documents, if any, representing or evidencing the Partnership Interests shall be delivered to Secured Party on the date hereof, and shall be held by Secured Party pursuant hereto at all times hereafter, and all certificates, instruments or documents representing or evidencing interests or securities in or issued by the Partnership and acquired by Pledgor after the date hereof and constituting collateral hereunder shall be delivered to Secured Party immediately upon, and held by Secured Party at all times after the acquisition thereof by Pledgor. All such certificates, instruments or documents, if any, shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to Secured Party. (b) Pledgor agrees that it shall take all actions available to Pledgor to cause the Partnership and, in the event of a merger or consolidation of the Partnership with any other entity, such other entity, not to issue any interests or other securities whether in addition to, by dividend or other distribution upon, or in substitution or exchange for, the Partnership Interests or otherwise, except for such interests or other securities issued to Pledgor in which Secured Party has a valid and perfected first-priority security interest free and clear of all other liens and encumbrances. 7. Secured Party Appointed Attorney in Fact, No Assumption. ------------------------------------------------------- (a) Pledgor hereby irrevocably appoints Secured Party as Pledgor's attorney-in-fact for the purpose of carrying out the provisions of this Agreement and taking any action and executing such instruments which Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, to preserve the validity, perfection and priority of the Security Interests granted hereunder and, following any Event of Default, to exercise its rights, remedies, powers and privileges under this Agreement, including, without limitation, (i) to ask, demand, collect, sue for, recover, receive and give receipt and discharge for amounts due or to become due under or in respect of all or any part of the Pledged Collateral, (ii) to receive, endorse and collect all instruments made payable to Pledgor representing payment of dividends, profits or any other distribution in respect of all or any part of the Pledged Collateral, (iii) to file any claims or take any action or institute any proceedings that Secured Party may deem necessary or desirable for the collection of any of the Pledged Collateral or otherwise enforce the rights of Secured Party with respect to any of the Pledged Collateral, and (iv) to execute, in connection with any sale or disposition of the Pledged Collateral under Section 13, any endorsements, assignments, bills of sale or other instruments of conveyance or transfer with respect to all or any part of the Pledged Collateral. (b) Anything to the contrary notwithstanding, Pledgor shall remain liable under the Partnership Agreement to the extent set forth therein and shall perform all of its duties and obligations under such Partnership Agreement to the same extent as if this Agreement had Page 59 of 77 not been executed. Secured Party shall not have any obligation or liability under the Partnership Agreement by reason of this Agreement, nor shall Secured Party be obligated to perform any of the obligations or duties of Pledgor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. 8. Dispositions and Release of Pledged Collateral. Pledgor covenants ---------------------------------------------- that it shall not enter into or perform any agreement to sell, assign, lease, transfer or otherwise dispose of all or any part of the Pledged Collateral without the prior written consent of Secured Party, unless the Security Interest in such Pledged Collateral shall have been released prior to the time such agreement is entered into. 9. Ratable Release of Security Interest. The Security Interest in the ------------------------------------ Pledged Collateral shall automatically be released upon and concurrent with any repayment of the principal balance of the Note in proportion to the percentage repayment of the principal balance of the Note (e.g., if the original principal balance is $100 and a principal repayment of $25 is made, 25% of the Pledged Collateral shall be released from the Security Interest; if an additional $15 principal repayment is made, 20% of the remaining Pledged Collateral shall be released (i.e., 15% of the original Pledged Collateral) such that the Security Interest would remain in effect with respect to 60% of the original Pledged Collateral). Secured Party shall execute, acknowledge and deliver to Pledgor such instruments as may be reasonably requested by Pledgor to evidence the release of the Security Interest pursuant to this Section 9. 10. Termination of Security Interest. The Security Interest shall -------------------------------- terminate upon payment and performance in full of the Obligations. Promptly following such payment and performance in full, Secured Party shall execute, acknowledge and deliver to Pledgor such instruments of discharge and release of the Security Interest as may be reasonably requested by Pledgor. 11. Representations and Warranties. Pledgor hereby represents and ------------------------------ warrants to Secured Party, as of the date hereof and, where relevant, until the Obligations are paid in full, that: (a) Pledgor has full power and authority to enter into and perform this Agreement and the Note; (b) all authorizations, consents, approvals, registrations, exemptions, permits and licenses with or from governmental authorities which are necessary for the execution and delivery by Pledgor of this Agreement and the Note, and the performance by it of its obligations hereunder and thereunder as already obtained have been effected or obtained and are in full force and effect, are final and are not subject to any pending or threatened judicial or administrative proceeding. (c) this Agreement and the Note constitute the valid and legally binding obligation of Pledgor, enforceable in accordance with their respective terms; and Page 60 of 77 (d) Pledgor is the legal and beneficial owner of the Pledged Collateral and no other person has any right, title, claim or interest (by way of security interest or other lien or charge or otherwise) in, against or to the Pledged Collateral, except as disclosed in writing to Secured Party prior to the date hereof. 12. Covenants of Pledgor. From the date hereof until the Obligations are -------------------- paid in full, Pledgor covenants and agrees that: (a) it shall do all acts that may reasonably be necessary to maintain, preserve and protect the Pledged Collateral and Secured Party's Security Interest therein; (b) it shall not create, incur, assume or suffer to exist any further assignment, encumbrance, or lien upon the Pledged Collateral without the prior written consent of Secured Party; (c) it shall not assign any of its rights or obligations hereunder or under the Note without the prior written consent of Secured Party; and (d) it shall appear in and defend any action or proceeding that may affect its title to or Secured Party's interest in the Pledged Collateral. 13. Default and Remedies. An Event of Default shall be deemed to have -------------------- occurred hereunder upon the occurrence of any of the following: (a) Pledgor shall default in the payment of principal or interest on the Note when due and shall remain in default for fifteen (15) days after receipt of notice of such default from Secured Party; (b) Any of the representations or warranties made by Pledgor herein shall be false or misleading in any material respect at the time made; or (c) Pledgor shall fail to perform or observe any other covenant, term, provision, condition, agreement or obligation of this Agreement or the Note and such failure shall continue unremedied for a period of thirty (30) days after receipt of notice of such failure, provided, that such failure shall not -------- be deemed an Event of Default if such failure cannot reasonably be cured within such thirty (30) day period, Pledgor promptly institutes and diligently pursues actions to cure such failure and Pledgor cures such failure within such period reasonably necessary; or (d) Pledgor shall admit in writing its inability to pay its debts as they mature; or make an assignment for the benefit of creditors, or apply for or consent to the appointment of or taking possession by a trustee, liquidator, assignee, custodian, sequestrator or receiver (or similar official) for it or for a substantial part of its property; or (e) A trustee, liquidator, assignee, custodian, sequestrator or receiver (or similar official) shall be appointed for Pledgor or for a substantial part of its property without its Page 61 of 77 consent and shall not be discharged within one hundred twenty (120) days after such appointment; or (f) A bankruptcy, reorganization, insolvency, or liquidation case or other case for relief under any bankruptcy law or any law for the relief of debtors shall be commenced by or against Pledgor and, if instituted against Pledgor, shall not be dismissed within one hundred twenty (120) days after such institution. Upon the occurrence of any such Event of Default, the outstanding principal balance on the Note, together with all accrued interest thereon shall, at the option of Secured Party (or, in the case of an Event of Default under clauses (d), (e) and (f), automatically) become immediately due and payable. Upon the occurrence of such Event of Default and acceleration by Secured Party of the Obligations secured hereby, Secured Party may, at its option, and without notice to or demand upon Pledgor and in addition to all rights and remedies available to Secured Party provided for herein or under the Note or otherwise available to it, exercise in respect of the Pledged Collateral, all rights and remedies of a secured party after default under the Uniform Commercial Code as in effect in any relevant jurisdiction at that time, including, without limitation, the right to reduce Secured Party's claim to a judgment, to foreclose upon the Pledged Collateral or any portion thereof at public or private sale, and otherwise to enforce Secured Party's Security Interest in any manner permitted by law. 14. Application of Proceeds. The proceeds of any sale of the Pledged ----------------------- Collateral shall be applied as follows: (a) To the payment of the reasonable costs and expenses (including legal fees and expenses) incurred by Secured Party in connection with the exercise of its rights or remedies, including costs and expenses incurred in retaking, holding and preparing for the sale and the selling of the Pledged Collateral and the discharge of all assessments, encumbrances, charges or liens, if any, on the Pledged Collateral prior to the lien hereof (except any taxes, assessments, encumbrances, charges or liens subject to which such sale shall have been made); (b) To the payment of all or any part of the Obligations (including principal and interest under the Note); and (c) The surplus, if any, shall be paid to such persons as are lawfully entitled to receive the same or shall be paid to whomsoever a court of competent jurisdiction may direct. 15. Cumulative Rights. The rights, powers and remedies of Secured Party ----------------- under this Agreement shall be in addition to all rights, powers and remedies given to Secured Party by virtue of any statute or rule of law, the Note or any other agreement, all of which rights, powers and remedies shall be cumulative and may be exercised successively or concurrently without impairing Secured Party's security interest in the Pledged Collateral. 16. Waiver. Any forbearance or failure to delay by Secured Party in ------ exercising any right, power or remedy hereunder or under the Note shall not preclude the further exercise thereof, and every right, power or remedy of Secured Party hereunder or under the Note shall Page 62 of 77 continue in full force and effect until such right, power or remedy is specifically waived in a writing executed by Secured Party. Pledgor waives any right to require Secured Party to proceed against any person or to exhaust any Pledged Collateral or to pursue any remedy in Secured Party's power. 17. Binding Upon Successors. All rights of Secured Party under this ----------------------- Agreement shall inure to the benefit of its successors and assigns, and all obligations of Pledgor shall bind its heirs, executors, administrators, permitted successors and assigns. 18. Entire Agreement; Severability. This Agreement contains the entire ------------------------------ security agreement between Secured Party and Pledgor. If any of the provisions of this Agreement shall be held invalid or unenforceable, this Agreement shall be construed as if not containing those provisions and the rights and obligations of the parties hereto shall be construed and enforced accordingly. 19. References. The singular includes the plural. If more than one ---------- executes this Agreement, the term Pledgor shall be deemed to refer to each of the undersigned as well as to all of them, and their obligations and agreements hereunder shall be joint and several. 20. Choice of Law. This Agreement shall be construed in accordance with ------------- and governed by the laws of the State of California, and, where applicable and except as otherwise defined herein, terms used herein shall have the meanings given them in the California Uniform Commercial Code. 21. Notice. Any notice, consent or other communication provided for in ------ this Agreement shall be in writing and shall be delivered, telecopied or sent by courier service or registered U.S. mail, with postage prepaid, to the following addresses: Secured Party: Essex Portfolio, L.P. 777 California Avenue Palo Alto, CA 94304 Pledgor: Michael J. Schall c/o Essex Property Trust, Inc. 777 California Avenue Palo Alto, CA 94304 Any such notice, consent or other communication shall be deemed to have been duly given when delivered in person or by courier service, upon receipt of telecopy or 4 business days after Page 63 of 77 deposit in registered U.S. mail, with postage prepaid and properly addressed. Such addresses may be changed by written notice given as provided herein. IN WITNESS WHEREOF, the parties hereto have executed this Pledge Agreement as of the date first written above. PLEDGOR: /s/ Michael J. Schall -------------------------------- Michael J. Schall SECURED PARTY: Essex Portfolio, L.P., a California limited partnership By: ESSEX PROPERTY TRUST, INC., a Maryland corporation Its: General Partner By: /s/ Keith R. Guericke ----------------------------- Keith R. Guericke Its: Chief Executive Officer Page 64 of 77 EX-10.6 7 PROMISSORY NOTE, 12/31/96, AND PLEDGE AGMT FOR MR. SCHALL EXHIBIT 10.6 PROMISSORY NOTE $50,000 December 31, 1996 Palo Alto, California FOR VALUE RECEIVED, the undersigned, MICHAEL J. SCHALL, an individual (the "Maker"), promises to pay on December 31, 2006 to ESSEX PORTFOLIO, L.P., a California limited partnership ("Lender"), or order, at such place as the holder hereof may from time to time designate, the principal sum of FIFTY THOUSAND DOLLARS ($50,000), together with interest thereon from the date hereof (the "Effective Date") until paid at the rate of eight percent (8%) per annum, non- compounded. Interest will be computed on a three hundred sixty-five (365) day (or, where appropriate, three hundred sixty-six (366) day) basis and the actual number of days elapsed. The Maker reserves the right to prepay this Note in whole or in part at any time, without penalty provided, however, that with each such prepayment, Maker shall also pay the interest accrued on the principal amount being prepaid to the date of such prepayment. This Note is secured by a Pledge Agreement, dated December 31, 1996 (the "Pledge Agreement"), from the Maker to Lender, granting a security interest to Lender in a portion of the Maker's partnership interest in Lender. Reference is made to such document for a description of the nature and extent of the security afforded thereby, the rights of the holder hereof in respect of such security, the acceleration of the maturity of the obligations hereunder upon the happening of certain events and the terms and conditions upon which this Note is secured. The holder of this Note is entitled to the benefits of the Pledge Agreement and may enforce the agreements of the Maker contained therein and exercise the remedies provided therein or otherwise in respect thereof, all in accordance with the terms thereof. The Maker, and any endorsers or guarantors hereof, jointly and severally waive diligence, presentment, protest and demand and also notice of protest, demand, dishonor and nonpayment of this Note, and expressly agree that this Note, or any payment hereunder, may be extended from time to time by the holder hereof without notice to or consent of the Maker or any endorser or guarantor hereof, and hereby consent to the acceptance by the holder hereof of further security or the release by the holder hereof of or change in any security for this Note without any need for any further consent by or notice to, and without in any way affecting the liability of, the Maker and any endorsers or guarantors hereof. No extension of time for the payment of this Note made by agreement by the holder hereof with any person now or hereafter liable for the payment of this Note shall affect the original liability under this Note of the Maker, even if the Maker is not a party to such agreement. The pleading of any statute of limitations as a defense to any demand against the Maker or any endorsers or guarantors hereof, is expressly waived by each and all of said parties to the full extent permitted by law. Page 65 of 77 The Maker agrees to pay all collection expenses, court costs and reasonable attorneys' fees and disbursements (whether or not litigation is commenced) which may be incurred in connection with the collection or enforcement of this Note. This Note shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the Maker has caused this Note to be executed as of the Effective Date. /s/ Michael J. Schall ----------------------------- Michael J. Schall Page 66 of 77 PLEDGE AGREEMENT THIS PLEDGE AGREEMENT (this "Agreement") is made as of December 31, 1996, by and between MICHAEL J. SCHALL, an individual ("Pledgor"), and ESSEX PORTFOLIO, L.P., a California limited partnership ("Secured Party"). RECITALS -------- A. Pledgor and Secured Party have entered into a Promissory Note dated December 31, 1996 (the "Note"), pursuant to which Secured Party has agreed to extend credit to Pledgor on the terms and subject to the conditions set forth therein. B. As additional security for the payment and performance of Pledgor's obligations to Secured Party under the Note, it is the intent of Pledgor to grant to Secured Party, and to create, a security interest in certain property of Pledgor, as hereinafter provided. AGREEMENT --------- NOW, THEREFORE, in consideration of the above Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Pledgor hereby agrees as follows: 1. Grant of Assignment and Security Interest. Pledgor hereby transfers, ----------------------------------------- assigns, pledges and confirms, and grants to Secured Party a security interest (the "Security Interest") in all of Pledgor's right, title and interest in and to the following pledged collateral, whether now owned or hereafter acquired (the "Pledged Collateral"): (a) the limited partnership interests in Essex Portfolio, L.P., a California limited partnership (formerly known as ESX Partners. L.P) (the "Partnership") owned by Pledgor as of the date hereof (the "Partnership Interests") that is equivalent to one thousand seven hundred two (1,702) shares of Essex Property Trust, Inc., any certificates or other instruments evidencing the Partnership Interests, all of Pledgor's right, title and interest in, to and under the Agreement of Limited Partnership dated March 15, 1994 (the "Partnership Agreement"), all of Pledgor's right to receive dividends, distributions, profits, cash, securities, instruments and other payments and property from time to time paid, payable or otherwise distributed in respect of or in exchange for all or any part of the Partnership Interests and all proceeds thereof; and (b) all partnership interests (general or limited) and securities issued by the Partnership, or any successor thereto, from time to time acquired by Pledgor in substitution of the foregoing, including, without limitation, all partnership interests or securities convertible into or exchangeable for such interests and all options, warrants and other rights to purchase such interests, all certificates and instruments evidencing such interests or securities, together with the interest coupons (if any) attached thereto, and all dividends, distributions, profits, cash, securities, instruments and other payments and property from time to time paid, payable or Page 67 of 77 otherwise distributed in respect of or in exchange for any or all of such interests or securities and all proceeds thereof. As used herein, the term "proceeds" shall be construed in its broadest sense and shall include whatever is receivable or received when any of the Pledged Collateral, or any proceeds thereof, is sold, collected, exchanged or otherwise disposed of, whether voluntarily or involuntarily, and shall include, without limitation, all rights to payment, including interest and premiums, with respect to any of the Pledged Collateral or any proceeds thereof. 2. Obligations. The obligations secured by this Agreement (collectively, ----------- the "Obligations") shall consist of: (a) The prompt payment in full when due (whether at stated maturity, by acceleration, or otherwise) of all indebtedness of Pledgor evidenced by the Note and all amendments, extensions and renewals thereof; (b) payment of all sums advanced in accordance herewith by or on behalf of the Secured Party to protect the Pledged Collateral following an Event of Default (as defined in Section 13); and (c) payment of all sums that may become due and payable to or for the benefit of the Secured Party pursuant to the terms of this Agreement and the Note; in each case, whether now existing or hereafter arising, voluntary or involuntary, absolute or contingent, liquidated or unliquidated, and whether or not from time to time decreased or extinguished and later increased, created, or incurred. 3. Voting Rights, Distributions. ---------------------------- (a) So long as no Event of Default shall have occurred and be continuing, Pledgor shall be entitled to (i) exercise any and all voting and other consensual rights pertaining to the Pledged Collateral belonging to Pledgor, or any part thereof, for any purpose not inconsistent with the terms of this Agreement or the Note, and (ii) receive and retain any dividends, distributions, profits, cash and other payments and property from time to time paid, payable or otherwise distributed in respect of the Pledged Collateral, provided, however, that any and all (A) dividends, profits, and other payments - ----------------- and distributions paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Pledged Collateral, (B) dividends, profits and other payments and distributions paid or payable in cash in respect of any Pledged Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, and (C) cash paid, payable or otherwise distributed in redemption of or in exchange for any Pledged Collateral shall be, and shall forthwith be delivered to Secured Party to hold as, Pledged Collateral and shall if received by Pledgor, be received in trust for the benefit of Secured Party, be segregated from other property or funds of Pledgor and be forthwith delivered to Secured Party as Collateral in the same form as so received (with all necessary endorsements). Page 68 of 77 (b) Upon the occurrence and continuance of any Event of Default and written notice from Secured Party to Pledgor, all rights of Pledgor to exercise voting and other consensual rights that it would otherwise be entitled to exercise pursuant to Section 3(a)(i) shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to exercise such voting and other consensual rights. Pledgor hereby irrevocably appoints the Secured Party as Pledgor's proxyholder with respect to the Partnership Interests and any other voting interests or other securities of Pledgor forming a part of the Pledged Collateral with full power and authority to vote such Partnership Interests and other voting interests or securities and to otherwise act with respect to such Partnership Interests or other voting interests or securities on behalf of Pledgor, provided that this proxy shall only be operative upon the occurrence of an Event of Default and only for so long as such default continues. This proxy shall be irrevocable for so long as any of the Obligations remains in existence. Pledgor shall execute and deliver (or cause to be executed and delivered) to Secured Party all proxies and other instruments as Secured Party may reasonably request for the purpose of enabling Secured Party to exercise the voting and other rights with respect to the Pledged Collateral which it is entitled to exercise pursuant to this Section 3(b). (c) Upon the occurrence and continuance of any Event of Default and written notice from Secured Party to Pledgor, all rights to receive any and all payments and other distributions with respect to the Pledged Collateral which Pledgor would otherwise be authorized to receive and retain pursuant to Section 3(a) (ii) shall cease and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to receive and hold such payments as Pledged Collateral for application against any of the Obligations. All payments which are received by Pledgor contrary to the provisions of this Section 3(c) shall be received in trust for the benefit of Secured Party, shall be segregated from other funds of Pledgor and shall be forthwith paid over to Secured Party as Pledged Collateral in the same form as so received (with any necessary endorsements). 4. Perfection of Security Interest. Concurrently with the execution of ------------------------------- this Agreement, Pledgor shall execute and deliver to Secured Party Uniform Commercial Code financing statements covering the Pledged Collateral. Pledgor agrees that Secured Party may file such financing statements with any and all governmental authorities that Secured Party deems appropriate for the purpose of perfecting the Security Interest in the Pledged Collateral. In the event any such financing statement is for any reason not acceptable to a governmental authority to which it is submitted for filing, Pledgor shall execute and deliver to Secured Party promptly upon Secured Party's request another financing statement in the form required by the governmental authority. In addition, upon request by Secured Party, Pledgor, at its own expense, shall deliver to the Partnership an order, satisfactory in form and substance to Secured Party, requesting that the pledge of Pledgor's interest as a limited partner in the Partnership be registered on the books of the Partnership. 5. Further Assurances. Pledgor agrees that at any time and from time to ------------------ time, at the expense of Pledgor, it will promptly execute and deliver all further instruments and documents, and take all further actions, that Secured Party may reasonably request, in order to perfect and protect the Security Interest in the Pledged Collateral granted or purported to be granted hereby Page 69 of 77 or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. 6. Delivery of Pledged Collateral; Issuance of Additional Interests. ---------------------------------------------------------------- (a) All certificates, instruments or documents, if any, representing or evidencing the Partnership Interests shall be delivered to Secured Party on the date hereof, and shall be held by Secured Party pursuant hereto at all times hereafter, and all certificates, instruments or documents representing or evidencing interests or securities in or issued by the Partnership and acquired by Pledgor after the date hereof and constituting collateral hereunder shall be delivered to Secured Party immediately upon, and held by Secured Party at all times after the acquisition thereof by Pledgor. All such certificates, instruments or documents, if any, shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to Secured Party. (b) Pledgor agrees that it shall take all actions available to Pledgor to cause the Partnership and, in the event of a merger or consolidation of the Partnership with any other entity, such other entity, not to issue any interests or other securities whether in addition to, by dividend or other distribution upon, or in substitution or exchange for, the Partnership Interests or otherwise, except for such interests or other securities issued to Pledgor in which Secured Party has a valid and perfected first-priority security interest free and clear of all other liens and encumbrances. 7. Secured Party Appointed Attorney in Fact, No Assumption. ------------------------------------------------------- (a) Pledgor hereby irrevocably appoints Secured Party as Pledgor's attorney-in-fact for the purpose of carrying out the provisions of this Agreement and taking any action and executing such instruments which Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, to preserve the validity, perfection and priority of the Security Interests granted hereunder and, following any Event of Default, to exercise its rights, remedies, powers and privileges under this Agreement, including, without limitation, (i) to ask, demand, collect, sue for, recover, receive and give receipt and discharge for amounts due or to become due under or in respect of all or any part of the Pledged Collateral, (ii) to receive, endorse and collect all instruments made payable to Pledgor representing payment of dividends, profits or any other distribution in respect of all or any part of the Pledged Collateral, (iii) to file any claims or take any action or institute any proceedings that Secured Party may deem necessary or desirable for the collection of any of the Pledged Collateral or otherwise enforce the rights of Secured Party with respect to any of the Pledged Collateral, and (iv) to execute, in connection with any sale or disposition of the Pledged Collateral under Section 13, any endorsements, assignments, bills of sale or other instruments of conveyance or transfer with respect to all or any part of the Pledged Collateral. (b) Anything to the contrary notwithstanding, Pledgor shall remain liable under the Partnership Agreement to the extent set forth therein and shall perform all of its duties and obligations under such Partnership Agreement to the same extent as if this Agreement had Page 70 of 77 not been executed. Secured Party shall not have any obligation or liability under the Partnership Agreement by reason of this Agreement, nor shall Secured Party be obligated to perform any of the obligations or duties of Pledgor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. 8. Dispositions and Release of Pledged Collateral. Pledgor covenants ---------------------------------------------- that it shall not enter into or perform any agreement to sell, assign, lease, transfer or otherwise dispose of all or any part of the Pledged Collateral without the prior written consent of Secured Party, unless the Security Interest in such Pledged Collateral shall have been released prior to the time such agreement is entered into. 9. Ratable Release of Security Interest. The Security Interest in the ------------------------------------ Pledged Collateral shall automatically be released upon and concurrent with any repayment of the principal balance of the Note in proportion to the percentage repayment of the principal balance of the Note (e.g., if the original principal ---- balance is $100 and a principal repayment of $25 is made, 25% of the Pledged Collateral shall be released from the Security Interest; if an additional $15 principal repayment is made, 20% of the remaining Pledged Collateral shall be released (i.e., 15% of the original Pledged Collateral) such that the Security ---- Interest would remain in effect with respect to 60% of the original Pledged Collateral). Secured Party shall execute, acknowledge and deliver to Pledgor such instruments as may be reasonably requested by Pledgor to evidence the release of the Security Interest pursuant to this Section 9. 10. Termination of Security Interest. The Security Interest shall -------------------------------- terminate upon payment and performance in full of the Obligations. Promptly following such payment and performance in full, Secured Party shall execute, acknowledge and deliver to Pledgor such instruments of discharge and release of the Security Interest as may be reasonably requested by Pledgor. 11. Representations and Warranties. Pledgor hereby represents and ------------------------------ warrants to Secured Party, as of the date hereof and, where relevant, until the Obligations are paid in full, that: (a) Pledgor has full power and authority to enter into and perform this Agreement and the Note; (b) all authorizations, consents, approvals, registrations, exemptions, permits and licenses with or from governmental authorities which are necessary for the execution and delivery by Pledgor of this Agreement and the Note, and the performance by it of its obligations hereunder and thereunder as already obtained have been effected or obtained and are in full force and effect, are final and are not subject to any pending or threatened judicial or administrative proceeding. (c) this Agreement and the Note constitute the valid and legally binding obligation of Pledgor, enforceable in accordance with their respective terms; and Page 71 of 77 (d) Pledgor is the legal and beneficial owner of the Pledged Collateral and no other person has any right, title, claim or interest (by way of security interest or other lien or charge or otherwise) in, against or to the Pledged Collateral, except as disclosed in writing to Secured Party prior to the date hereof. 12. Covenants of Pledgor. From the date hereof until the Obligations are -------------------- paid in full, Pledgor covenants and agrees that: (a) it shall do all acts that may reasonably be necessary to maintain, preserve and protect the Pledged Collateral and Secured Party's Security Interest therein; (b) it shall not create, incur, assume or suffer to exist any further assignment, encumbrance, or lien upon the Pledged Collateral without the prior written consent of Secured Party; (c) it shall not assign any of its rights or obligations hereunder or under the Note without the prior written consent of Secured Party; and (d) it shall appear in and defend any action or proceeding that may affect its title to or Secured Party's interest in the Pledged Collateral. 13. Default and Remedies. An Event of Default shall be deemed to have -------------------- occurred hereunder upon the occurrence of any of the following: (a) Pledgor shall default in the payment of principal or interest on the Note when due and shall remain in default for fifteen (15) days after receipt of notice of such default from Secured Party; (b) Any of the representations or warranties made by Pledgor herein shall be false or misleading in any material respect at the time made; or (c) Pledgor shall fail to perform or observe any other covenant, term, provision, condition, agreement or obligation of this Agreement or the Note and such failure shall continue unremedied for a period of thirty (30) days after receipt of notice of such failure, provided, that such failure shall not be deemed an Event of Default if such failure cannot reasonably be cured within such thirty (30) day period, Pledgor promptly institutes and diligently pursues actions to cure such failure and Pledgor cures such failure within such period reasonably necessary; or (d) Pledgor shall admit in writing its inability to pay its debts as they mature; or make an assignment for the benefit of creditors, or apply for or consent to the appointment of or taking possession by a trustee, liquidator, assignee, custodian, sequestrator or receiver (or similar official) for it or for a substantial part of its property; or (e) A trustee, liquidator, assignee, custodian, sequestrator or receiver (or similar official) shall be appointed for Pledgor or for a substantial part of its property without its Page 72 of 77 consent and shall not be discharged within one hundred twenty (120) days after such appointment; or (f) A bankruptcy, reorganization, insolvency, or liquidation case or other case for relief under any bankruptcy law or any law for the relief of debtors shall be commenced by or against Pledgor and, if instituted against Pledgor, shall not be dismissed within one hundred twenty (120) days after such institution. Upon the occurrence of any such Event of Default, the outstanding principal balance on the Note, together with all accrued interest thereon shall, at the option of Secured Party (or, in the case of an Event of Default under clauses (d), (e) and (f), automatically) become immediately due and payable. Upon the occurrence of such Event of Default and acceleration by Secured Party of the Obligations secured hereby, Secured Party may, at its option, and without notice to or demand upon Pledgor and in addition to all rights and remedies available to Secured Party provided for herein or under the Note or otherwise available to it, exercise in respect of the Pledged Collateral, all rights and remedies of a secured party after default under the Uniform Commercial Code as in effect in any relevant jurisdiction at that time, including, without limitation, the right to reduce Secured Party's claim to a judgment, to foreclose upon the Pledged Collateral or any portion thereof at public or private sale, and otherwise to enforce Secured Party's Security Interest in any manner permitted by law. 14. Application of Proceeds. The proceeds of any sale of the Pledged ----------------------- Collateral shall be applied as follows: (a) To the payment of the reasonable costs and expenses (including legal fees and expenses) incurred by Secured Party in connection with the exercise of its rights or remedies, including costs and expenses incurred in retaking, holding and preparing for the sale and the selling of the Pledged Collateral and the discharge of all assessments, encumbrances, charges or liens, if any, on the Pledged Collateral prior to the lien hereof (except any taxes, assessments, encumbrances, charges or liens subject to which such sale shall have been made); (b) To the payment of all or any part of the Obligations (including principal and interest under the Note); and (c) The surplus, if any, shall be paid to such persons as are lawfully entitled to receive the same or shall be paid to whomsoever a court of competent jurisdiction may direct. 15. Cumulative Rights. The rights, powers and remedies of Secured Party ----------------- under this Agreement shall be in addition to all rights, powers and remedies given to Secured Party by virtue of any statute or rule of law, the Note or any other agreement, all of which rights, powers and remedies shall be cumulative and may be exercised successively or concurrently without impairing Secured Party's security interest in the Pledged Collateral. 16. Waiver. Any forbearance or failure to delay by Secured Party in ------ exercising any right, power or remedy hereunder or under the Note shall not preclude the further exercise thereof, and every right, power or remedy of Secured Party hereunder or under the Note shall Page 73 of 77 continue in full force and effect until such right, power or remedy is specifically waived in a writing executed by Secured Party. Pledgor waives any right to require Secured Party to proceed against any person or to exhaust any Pledged Collateral or to pursue any remedy in Secured Party's power. 17. Binding Upon Successors. All rights of Secured Party under this ----------------------- Agreement shall inure to the benefit of its successors and assigns, and all obligations of Pledgor shall bind its heirs, executors, administrators, permitted successors and assigns. 18. Entire Agreement; Severability. This Agreement contains the entire ------------------------------ security agreement between Secured Party and Pledgor. If any of the provisions of this Agreement shall be held invalid or unenforceable, this Agreement shall be construed as if not containing those provisions and the rights and obligations of the parties hereto shall be construed and enforced accordingly. 19. References. The singular includes the plural. If more than one ---------- executes this Agreement, the term Pledgor shall be deemed to refer to each of the undersigned as well as to all of them, and their obligations and agreements hereunder shall be joint and several. 20. Choice of Law. This Agreement shall be construed in accordance with ------------- and governed by the laws of the State of California, and, where applicable and except as otherwise defined herein, terms used herein shall have the meanings given them in the California Uniform Commercial Code. 21. Notice. Any notice, consent or other communication provided for in ------ this Agreement shall be in writing and shall be delivered, telecopied or sent by courier service or registered U.S. mail, with postage prepaid, to the following addresses: Secured Party: Essex Portfolio, L.P. 777 California Avenue Palo Alto, CA 94304 Pledgor: Michael J. Schall c/o Essex Property Trust, Inc. 777 California Avenue Palo Alto, CA 94304 Any such notice, consent or other communication shall be deemed to have been duly given when delivered in person or by courier service, upon receipt of telecopy or 4 business days after Page 74 of 77 deposit in registered U.S. mail, with postage prepaid and properly addressed. Such addresses may be changed by written notice given as provided herein. IN WITNESS WHEREOF, the parties hereto have executed this Pledge Agreement as of the date first written above. PLEDGOR: /s/ Michael J. Schall ------------------------------------ Michael J. Schall SECURED PARTY: Essex Portfolio, L.P., a California limited partnership By: ESSEX PROPERTY TRUST, INC., a Maryland corporation Its: General Partner By: /s/ Keith R. Guericke ------------------------- Keith R. Guericke Its: Chief Executive Officer Page 75 of 77 EX-11.1 8 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11.1 ESSEX PROPERTY TRUST, INC. STATEMENT OF COMPUTATION OF EARNINGS PER SHARE (In thousands except share and share amounts)
Quarter ended March 31, ------------------------------ 1997 1996 ----------- ---------- PRIMARY: Net income/(loss) $ 4,868 $ (57) Less: Dividends on 8.75% Convertible Preferred Stock, Series 1996A 438 0 ----------- ---------- Net income/(loss) applicable to common stockholders $ 4,430 $ (57) =========== ========== Weighted average shares outstanding 11,594,606 6,275,000 Weighted average shares of dilutive stock options using average stock price under the treasury stock method 190,346 0 ----------- ---------- Weighted average shares used in net income per share calculation 11,784,952 6,275,000 =========== ========== Net income per share/(loss) $ 0.38 $ (0.01) =========== ========== FULLY - DILUTED: Adjusted shares - primary, from above 11,784,952 - Weighted average shares issuable upon conversion of the 8.75% Convertible Preferred Stock, Series 1996A 914,286 - Additional weighted average shares of dilutive stock options using end of period stock price under the treasury stock method 2,781 - ----------- ---------- Weighted average number of common shares - assuming full dilution 12,702,019 N/A =========== ========== Earnings per common share - assuming full dilution $ 0.38 (1) N/A (2) =========== ==========
(1) For March 1997, the 8.75% Convertible Preferred Stock, Series 1996A were antidilutive and accordingly, the results of the primary earnings per share is reported for earnings per common share - assuming full dilution. (2) The 8.75% Convertible Preferred Stock, Series 1996A was issued in July, 1996. Page 76 of 77 EX-12.1 9 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1 ESSEX PROPERTY TRUST, INC. Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends (in thousands, except ratios)
Essex Partners Essex Property Trust, Inc. Properties ---------------------------------------------------------------- --------------- Period of Period of June 13, January 1, 1994 1994 Quarter ended Year ended Year ended to to March 31, December 31, December 31, December 31, June 12, 1997 1996 1995 1994 1994 ------- -------- -------- ------- ------- Earnings: Income before provision for income taxes, extraordinary items and minority interest $ 5,743 $ 14,970 $ 14,244 $ 4,397 $ 332 Interest expense 3,363 11,442 10,928 4,304 5,924 Amortization of deferred financing costs 127 639 1,355 773 96 Capitalized interest 61 115 92 - - ------- -------- -------- ------- ------- Total earnings $ 9,294 $ 27,166 $ 26,619 $ 9,474 $ 6,352 ======= ======== ======== ======= ======= Fixed charges: Interest expense $ 3,363 $ 11,442 $ 10,928 $ 4,304 $ 5,924 Convertible preferred stock dividends 438 635 - - - Amortization of deferred financing costs 127 639 1,355 773 96 Capitalized interest 61 115 92 - - ------- -------- -------- ------- ------- Total fixed charges and preferred stock dividends 3,989 12,831 12,375 5,077 6,020 ------- -------- -------- ------- ------- Ratio of earnings to fixed charges (excluding preferred stock dividends) 2.62 2.23 2.15 1.87 1.06 ======= ======== ======== ======= ======= Ratio of earnings to combined fixed charges and preferred dividends 2.33 2.12 2.15 1.87 1.06 ======= ======== ======== ======= =======
Page 77 of 77 EX-27 10 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 12,916 0 88,255 0 0 46,921 481,018 50,703 543,029 19,636 217,778 0 1 1 280,404 543,029 0 18,551 0 8,802 1,391 0 3,363 5,743 0 5,743 0 0 0 4,868 0.38 0.38
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